Sensex soars on Iran nuclear deal: Why markets may be jumping the gun

The Indian markets are rejoicing after Iran and six world super powers signed the historic nuclear deal over the weekend. As per the deal, Iran will take steps to bring down its nuclear weapon programme, which is expected to ease the geo-political tension in the West Asian region.

The deal has widely known to be favouring India as it will bring down oil prices. India imports 80 percent of its oil requirement and the commodity accounts for a lion’s share of the country’s import bill.

Both the Sensex and Nifty ended up about 2 percent at 20,605.08 and 6,115.35. The rupee is also up at 62.49.

But here are three reasons why the markets may be over reacting to the deal:

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1) Many analysts expect India’s oil import bill to come down as the global oil prices fall after the easing of geo-political tension in the West Asian region. But this may not be so because supply disruptions and uncertainty are not the only factors supporting the elevated oil prices. There is also huge amount of global liquidity fuelled by quantitative easing in major economies. This liquidity is being channelled into oil, which is inflating its prices. The liquidity will continue as long as key developed nations continue with their accommodative policies. So a sharp fall in oil prices is unlikely. Moreover, as this report in the Business Standard says, there are concerns that the deal is likely to scuttle India’s plan to cut oil import bill by $8.4 billion. India was planning to make 100 percent rupee payments for crude oil imports from Iran. Oil Minister Veerappa Moily was expecting to save $8.4 billion in import bill using this strategy. Now that there has been a resolution, this is not necessary.

[caption id=“attachment_1127001” align=“alignleft” width=“380”]  The Iran nuclear issue had more of a psychological significance. So the impact of the resolution is also psychological. Reuters[/caption]

2) The Iran nuclear issue had more of a psychological significance. So the impact of the resolution is also psychological. It was almost a foregone conclusion that the US will not attack Iran since this would have had bigger ramifications. Moreover, there has not been any resolution to geo-political issues in the region as Syria and Libya continue to simmer.

3) Tapering of quantitative easing in the US continue to be single the biggest threat to the Indian markets. A revival in the US economy will definitely result in a huge foreign fund outflow, given the huge amount FIIs have invested in Indian equities.