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Rising crude oil prices – Impact on Indian economy

Guest Author: Abhinav Mishra

Crude oil prices are rising and India imports more than 80% of its oil needs. Looking at the past two years’ data, I can say that the crude price is continuously going north. The crude oil price has broken all records in the last six weeks.

The average crude oil import cost for India was $44.82 a barrel (2020-21). It went to $60.47 in the pre-pandemic year. For FY22, the import prices have stayed above the 2019-20 levels. Recently, crude oil has touched $140 per barrel. Though in the last one week or so, the price had come below $100, it is again back to $110.

Let us look at the impact of higher crude oil prices on India.

The higher import bill for India

As per analysts, for every $10 rise in crude oil price, the Indian fiscal deficit increases by ten basis points. Morgan Stanley, in its recent report, mentioned a 25%+ jump in oil prices will expand the current account deficit by 75 bps for India.

As mentioned above, the import bill is continuously rising because of it. With higher import bills, the government’s fiscal deficit for the current year is likely to increase. A rise in fiscal deficit could negatively affect the economy and the Indian markets.

The below image shows how much TONNE Million India has imported in the last five years. The volume is on the rise. With rising costs, the import bill is 100% going up.

The good for the Indian economy is that the oil consumption as the percent of GDP is continuously declining. The below image reflects it. India’s oil consumption as a share of GDP is now marginally below the 10-year average since 2017.

Depreciating Indian Rupee

The increase in crude oil price directly impacts the Indian rupee. The crude oil is purchased in US dollars by the Indian government. With increasing crude oil prices, India has to purchase more dollars. To do so, it has to sell the Indian rupee. It makes the Indian rupee weak against the dollar. If the crude oil remains high, the rupee most likely will depreciate further. The rupee touched the 77 mark for a dollar last recently (lifetime low).

Inflation worries

Higher crude oil prices will also increase inflation in India. It is never good for end-consumers. Analysts have said that a 25%+ jump in oil prices will expand inflation by 100 bps on an annualized basis for India. How will it happen? 

With the higher price, the transportation cost for passengers and freight will increase. The cost to transport daily items increases because of higher fuel costs. It will increase the cost of manufacturing goods, vegetables, etc.

Look at it this way – to manufacture a product, a company requires multiple inputs (raw material). All the raw material comes from different sources at the manufacturing unit. With the higher transportation cost, the cost of every material will increase. Also, as mentioned above, the cost to transport the final manufactured product will increase. 

The company may or may not increase the price. If the price is not increased, its margins will go down. So the profits. If it increases the cost by passing the increased input costs to consumers, it will reflect in the wholesale price index. 

Impact on Sensex/NIFTY

Is the depreciating rupee good or bad? One can debate this. If you look at any stock market, the market wants stability. The rising crude oil price and the rupee depreciating are never taken positively by the market. With volatility in these, the market also remains volatile. 

We saw the impact in the first and second week of March. NIFTY went below 16000 levels as the rupee depreciated and crude oil touched $140.

However, these are short-term impacts. If you compare the crude oil price movement with the Indian stock market and check the correlation, you get to know the long-term impact. The correlation is merely 4% which hardly implies any relationship. Long-term investors should not be too worried about rising crude oil prices. 

India’s strong policy environment and declining oil intensity are the main reasons the Indian market is faring better than other economies and will continue to do better.

Impact on Stocks

For individual stocks, some stocks benefit from the increasing crude oil price. At the same time, some suffer.

Stocks with positive impact – If Brent settles at $85 a barrel from FY23 on unchanged costs, the profit of companies like ONGC and Oil India will increase by 11 to 14%. Oil Marketing Companies (OMCs) may see an increase in PAT (Profit After Tax) by 14-16%.

Stocks with negative impact – Crude oil acts as raw material for many Indian companies. Industries like tyres, lubricants, footwear, refining, and airlines are adversely impacted by an increase in crude price.

The profitability of these companies gets impacted by rising raw material costs. Asian Paint is a perfect example of it. As long as the oil prices increased, the stock was continuously declining. 

Before you go

I hope you are now clear why so much importance is given to oil prices in the media and the equity market. As an investor, you can do better in the market only when you understand the impact of such factors in the Indian economy (macro level) and on your stocks.

Join the Multipie community for more insights and stock specific gainers and losers from Crude oil inflation.

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