Rising oil prices may take shine off Sensex, Nifty
Mumbai: A steady rise in crude oil prices could take the wind out of the markets’ sails, analysts said, as rising risks of fiscal slippage, greater inflationary pressures and lower likelihood of an RBI rate cut in December prompt investors to review their positions.
Brent crude oil hit $62.46 per barrel on Monday—a 26-month high—after Saudi Arabia’s King Salman ordered the arrest of ministers, princes and billionaires in an anti-graft drive in the world’s biggest crude exporter.
Despite oil’s rise, on Monday, the BSE Sensex rose 0.14%, ending at a record close of 33,731.19, having hit an intraday record earlier in the session.
Oil has risen for four straight weeks on signs that global inventories are shrinking and the Organization of Petroleum Exporting Countries and allied producers will extend output cuts beyond their March expiry. Saudi Arabia has signalled firm support for an extension. In 2017 so far, crude prices are up 9.98%.
Higher oil prices will weaken growth, drive up inflation and worsen the twin deficits, fiscal and current account deficits, Japanese securities house Nomura Holdings Inc. said. “We estimate that every $10 per barrel rise in crude oil price worsens the central government’s fiscal balance by 0.1% of gross domestic product (GDP). Every Re1 per litre reduction in the excise duty on petrol and diesel lowers government excise collections by Rs13,000 crore (0.08% of GDP) annually,” Sonal Varma, managing director and chief India economist at Nomura, wrote in a note on 1 November.
When crude oil prices rise, the government at times reduces excise duty on auto fuel to soften the impact on motorists, sacrificing some of its revenue.
The Indian economy grew 5.7% in the June quarter, the slowest pace in three years, struggling with the aftermath of demonetization in November and the run-up to the July implementation of the goods and services tax (GST).
Analysts said that slowing growth may hurt investor sentiment and squeeze the liquidity that drove Indian stock indices higher this year, putting them among Asia’s best performing equity markets in 2017. Benchmark indices Sensex and Nifty have gained 26.7% and 27.7%, respectively, this year.
“Market sentiment may turn negative in the initial phase when Brent crude goes above $60 per barrel,” said Rusmik Oza, head, midcaps, at Kotak Securities.
Weak economic growth, expensive valuations and disappointing corporate earnings prompted foreign institutional investors (FIIs) to pull money out of India in August and September. They returned in October on hopes of an economic recovery after the government’s recapitalization plans for state-owned banks and an infrastructure push.
In November, FIIs have bought $399.56 million worth of Indian equities, while investing $6.21 billion in 2017. Domestic institutional investors have pumped in Rs71,847.98 crore this year but sold Rs1,091.02 crore worth of shares in November.
However, with the fiscal deficit touching 91.3% of the budget estimate at the end of the first half of the fiscal year, there are concerns yet again of a fiscal slippage which may impact growth, inflation and interest rates.
Overall, the Reserve Bank of India (RBI) estimates that, for every $10 per barrel rise in oil price, GDP growth will be affected by around 0.15 percentage point. Higher oil prices directly impact 7.4% of the wholesale price index (WPI) basket in addition to having some indirect effects on crude derivatives such as chemicals. Nomura estimates that a $10 rise in crude oil prices would increase WPI inflation by around 1.3-1.4 percentage points and worsen India’s annual current account balance by 0.4% of GDP.
Higher oil prices drive up inflation, putting pressure on monetary policy as RBI remains watchful of developments on the inflation front, according to CARE Ratings Ltd. “Further, if crude oil prices remain high, there would be a change in the trade dynamics which can affect the trade deficit and finally influence the direction of movement of the rupee which is presently quite strong in the region of Rs64 per dollar. It is against this background that certain possibilities are explored,” it added.
India is the world’s third-largest consumer of crude oil. According to Petroleum Planning and Analysis Cell (PPAC) and CARE Ratings estimates, India imports around 4.2 million barrels per day.
“At the macro level, with imports of 1,575 million barrels of crude oil on an annualized basis, a dollar increase in prices on a permanent basis would increase the bill by roughly $1.6 billion or Rs10,000 crore on an annual basis. In FY17, the oil import bill was $86 billion, with physical imports of $215 million tonnes averaging around $55 per barrel. If prices do reign at above $ 60/barrel, then there would be pressure on the import bill by around $8-10 billion. Given that the trade deficit has been widening of late at $74.3 billion for the first six months compared with $43 billion last year, the balance of payments would be pressurized,” said the rating agency.
Analysts say that could impact weak macros leading to FIIs withdrawing money from India. “Global growth is very strong. Along with that, if inflation rises, then it provides the necessary reason for central banks to raise rates. For India, against this background, it will be difficult for RBI to cut rates as they reassess their inflation target. Higher oil prices would lead to rupee depreciation against the dollar, which in turn will impact FII flows. To this extent, FIIs could continue to remain sellers in emerging markets and India,” said Oza.
The Economic Survey 2017 presented in February had said that rising oil prices present a challenge to India’s growth, projecting the economy to grow in the range of 6.75-7.50% in 2017-18. India imports around 80% of its crude oil requirements.
Bloomberg contributed to this story.