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NEW DELHI : Falling crude oil prices on fears of an impending global recession could help offset inflationary risks in the economy, arrest the rupee’s free fall, boost corporate margins and slow the pace of interest rate hikes, analysts said.

Crude prices continued declining on Wednesday after a selloff on the previous day when prices tumbled by about 8% to breach the $100 per barrel mark for the first time in three months, on concerns about a global economic slowdown and growing covid cases in China.

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Brent for September settlement slipped 30 cents to $99.19 a barrel on Wednesday, while the West Texas Intermediate variant traded at $96 a barrel.

While a potential recession in the Western economies will adversely impact demand for India’s exports, analysts said a sustained fall in crude prices would protect the margins of Indian companies, which have seen a sharp erosion due to a spike in energy prices after Russia invaded Ukraine in February. India imports about 85% of its oil requirements.

On Wednesday, US inflation quickened to 9.1%, the fastest pace in 41 years, setting the Federal Reserve on track for another big interest-rate hike later this month. “The major positive development from India’s economic and market perspective is the crash in Brent crude to below $100 for the first time since 22 March. The bulls are likely to latch on to this good news," said V.K. Vijayakumar, chief investment strategist at Geojit Financial Services. Brent had seen closing highs of $127.18 a barrel last month, and its decline to sub-$100 levels is a key positive.

Sachchidanand Shukla, chief economist of Mahindra and Mahindra, said the fall in global oil prices would help India’s trade balance after the record June trade deficit. The narrowing of the trade gap will support the Indian currency, which hit a record low for a third session on Wednesday as foreign investors continued to dump local assets. The rupee declined by 22 paise to close at 79.81 against the US currency as concerns about US inflation weighed on traders.

India’s benchmark indices started trading on Wednesday in positive territory, helped by the decline in crude prices and strong macro numbers, but gave up the gains later in the day as negative trends in European markets made investors nervous. The Sensex and the Nifty fell by 0.69% and 0.57%, respectively. “Crude price falling below $100 can be a positive trigger for the rupee, but inflation numbers from the US shall give a major trigger to rupee movement against the dollar," said Jateen Trivedi, an analyst at LKP Securities.

Analysts warned the rate action in the US would likely influence markets in the near term, but it will not be without a likely silver lining in the long term.

June CPI inflation in the US was expected at 8.8%. However, the reported number came at 9.1%, which is not good news for markets, analysts said. With the prevailing risk-off sentiment, demand for the dollar is likely to remain high, putting pressure on the rupee, they said, adding that falling commodity and crude prices may accrue positive in the near term.

An important short-term trend is the weakness in information technology stocks because of a possible recession in the US and Europe and the strength in banking stocks because of robust credit growth in India. “IT is weak on margin pressure in the industry and fears of a possible US recession fallout. On the other hand, banking is strong due to the strong fundamentals of the banking segment and the impressive credit growth underway in the economy," said Siddhartha Khemka, head of retail research, Motilal Oswal Financial Services Ltd.

Sectors likely to see a respite from selling pressure due to the recent weakness in crude prices include auto, cement, airlines, paints and petrochemicals. Shares of the country’s leading airline, IndiGo, surged 2.88% on Wednesday. Asian Paints’ stock rose 1.7%. Cement firms, which are reeling under intense cost pressures, could also see their margins improve. For auto companies, declining fuel prices may boost demand as the cost of ownership declines.

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