NEW DELHI: With Brent crude prices hovering around the $64 a barrel mark, the highest in more than two-and-a-half years, analysts and economists have sat up and took note.
Asia’s emerging markets such as India and Indonesia run large current account deficit (CAD), in which the oil bill is the biggest component.
Crude oil prices above $60 a barrel is a concern for India’s domestic economy. It can potentially have a bearing all across from causing a spike in inflation, raising raw material (RM) cost and, thus, profitability for a good section of India Inc, influence the central bank’s interest rate policy and alter the exchange rate dynamics.
This can derail the stock market, too.
The exuberant Indian equity market needs to digest the far-reaching implications of the grave geopolitical developments unfolding in the West Asia seriously, says Ajay Bodke, CEO & Chief Portfolio Manager at Prabhudas Lilladher.
Foreign investors have already turned wary of Indian stocks, as most valuation parameters for the Nifty50 such as CAPE (cyclically adjusted price-to-earnings ratio), bond yield-earnings yield spread, market cap-to-GDP ratio and forward PE multiples quoted at elevated levels compared with their long-term averages.
The BSE Sensex is up 27 per cent this calendar, compared with an 8 per cent rise in China’s Shanghai Composite.
Crude at $64 can hurt rupee, rates & markets.
On Tuesday, domestic equity indices trading in the red, with the Sensex down nearly 150 points and the Nifty some 50 points.
The spike in crude oil prices globally was attributed to the Saudi crown prince’s bid to tighten his grip on power and also flaring tension between the kingdom and Iran.
The spike in crude oil prices globally was attributed to the Saudi crown prince’s bid to tighten his grip on power and also flaring tension between the kingdom and Iran.
Besides, a pledge by the Organisation of the Petroleum Exporting Countries (Opec) last week to keep trimming production till ‘normalcy’ returns also supported the prices of the black gold.
Oil is a double-edged sword for the Indian economy, says Sunil Kumar Sinha , Principal Economist, India Ratings. Anything beyond $60 a barrel is a challenge for the Indian government.
Only recently, the government had cut down central duties on petrol following a public outcry, to make the motor fuel somewhat cheaper for the common man.
Bodke says every $1 per barrel rise in crude oil prices inflates India’s import bill by $1.33 billion, which can potentially put downward pressure on the domestic currency.
India’s import bill rises by $1.03 billion for every Re 1 weakening in the dollar exchange rate. In a fiscally-constrained environment, a weakening rupee can lead to higher fiscal deficit, if the government decides not to allow the OMCs to hike petrol and diesel prices for consumers and instead absorbs the increased import bill, Bodke pointed out.
He says the spike in crude oil prices can raise prices of crude derivatives used as raw materials by a whole host of industries, and that can squeeze margins.
Motilal Oswal Securities says the increase in crude oil prices can put inflation estimates at risk. To that extent, it may crimp the RBI’s ability to cut interest rates in December.
Source: economictimes.indiatimes.com