There are at least four reasons for the meltdown in the Indian market-- and the mood tomorrow will depend on the Fed

• Sensex lost over 640 points, about 1.4%, as the fear of rising oil prices pushed investors to dump stocks.
• China's industrial output growth hit a 17-year low, reflecting the damage from the trade war with US, and that too added to the market gloom.
• Going forward, the decision from the US Federal Reserve will be drive investor sentiment across the globe.

Indian stock markets are getting squeezed from the oil crisis in the Middle East on one side, the US-China trade war causing an industrial slowdown on the other, the fear of the United States Federal Reserve from a third corner, aside from a worsening slump in the economy at home.

Hopes floats that the American Central Bank under Jerome Powell will cut rates, especially with overt pressure from President Donald Trump who has called for zero interest rates. All eyes will be on the outcome of the two-day meeting that will end in a few hours from now.

However, ahead of the cue from the Fed, the Sensex lost over 640 points, about 1.4%, as the fear of rising oil prices pushed investors to dump stocks. Making matters worse, China's industrial output growth hit a 17-year low, reflecting the damage from the trade war with US, and that too added to the market gloom.

Oil crisis in the Middle East

The drone attacks on Aramco's unit have driven oil prices up last couple of days. The fear of intensifying geopolitical risks, particularly between Saudi Arabia and Iran, has led to speculation that oil supply from the world's largest oil producer may face disruption, causing the rise in prices for future contracts.

For India, which imports over 80% of all the crude oil it needs, this is terrible news. If oil gets expensive, it will fuel inflation, reduce the value of the rupee, increases the borrowing cost for the government, and it leaves lesser money with the government to invest in productive efforts.

The ripple effect will also affect industries that thrive on cheap oil. Automobiles, for instance. People delay purchase of cars when oil prices rise. And that is a double whammy for Indian car makers that have seen falling sales for nearly a year now. The auto index was the worst loser in both the Bombay Stock Exchange and the National Stock Exchange on Tuesday (September 17), down over 1.75%.

The economic slowdown at home

The rupee has also weakened a lot and it affects companies that import a lot of their inputs. State-owned banks in India that are forced to hold a certain amount of government bonds will also be hurt by the rising yield (in other words, loss of value of the securities).

The Indian economy is in the grip of the severe slowdown as witnessed in falling consumption as well as saving and investments. The Finance Ministry under Nirmala Sitharaman has announced two rounds of stimulus in the last two months, and the Reserve Bank of India (RBI) has announced four interest rate cuts this year but investor sentiment is far from recovering.

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