Oil Prices and the Indian economy & financial markets
The rally in oil prices over the last 12 months has raised the specter of inflation. A rise or fall in the price of oil affects different company shares to varying extents. When it comes to the Indian stock market as the country imports more than 75 per cent of its oil requirement for domestic consumption, declines in the oil price improve the trade balance and support the rupee over the medium term.
Every US $10 rise or decline in the price of oil raises/decreases the current account deficit by over 0.50 per cent in any given year. Therefore, a fall in the price of crude oil will have a positive impact on India’s current account deficit (CAD) situation. Lower CAD will mean reduced stress on foreign currency outflows. This, in turn, may lead to rupee appreciation. If the value of the rupee appreciates, the imports become cheaper. This will affect the companies, which depend on import crude oil and other raw materials, for their businesses.
Some companies experience a rise in the cost of their production as oil prices increase. Companies like tyres, lubricants, logistics, footwear, refinery, and airlines hugely depend on crude oil prices. Further, products like paints too will benefit from reduced crude oil prices. This is because most paints used today are oil-based. A fall in crude oil prices affects the input cost of producing these goods. Thus, a fall in crude oil prices has a positive impact on the stocks of these companies.
A rise in oil prices also raises transportation costs. Crude oil prices have a considerable impact on the prices of consumer durables. These products are manufactured in industrial units and then sold in various cities across India. A fall in the logistics cost of these goods will bring down their final price. A fall in prices of consumer goods raises its demand and thus, its stock price.
A rise in the price of oil can also impact a rise in inflation. Every US $10 rise in the price of oil will raise inflation by 0.30 per cent or 30 basis points. Investors often perceive higher inflation negatively.