Markets
Sizzling oil worldwide, rising worries in India
Summary
The recent upward pressure on oil prices is primarily led by supply-side concerns, with Saudi Arabia and Russia deciding to extend their voluntary output cuts till the end of December.The ghost of rising oil prices is back to haunt the economy. Brent crude oil prices are now hovering around $96 per barrel, up more than 30% since 31 May. The recent upward pressure on oil prices is primarily led by supply-side concerns, with Saudi Arabia and Russia deciding to extend their voluntary output cuts till the end of December. When oil prices rise, India tends to feel the heat as we import most of our oil requirements. Costlier oil pushes up the oil import bill, which ultimately weighs on the country’s current account deficit.
But note that other Asian economies are also vulnerable to rising oil prices. “Within Asia, India, Thailand and the Philippines appear more vulnerable to higher oil prices," said a Nomura Global Markets Research report dated 15 September.
“With price controls/subsidies in place, India and Thailand are vulnerable to worsening current account balances, while the Philippines is vulnerable on both fronts, making it most at risk amid an already-weak starting point," the report added.
In India, since May 2022, retail prices of petrol and diesel have not been revised in keeping with global oil price movement, even when oil prices were lower. A combination of higher oil prices and unchanged retail fuel prices is not favourable for state-run Indian oil marketing companies, as their marketing margins get affected. With FY24 being an election-heavy period, the likelihood of diesel and petrol price hikes is lower.
If oil prices continue to rise and/or stay elevated for longer, it would impact sectors such as aviation, fast-moving consumer goods, tyres, cement and paints. These sectors use crude or crude derivatives as inputs; thus, costs would rise for them, potentially hurting profitability. In response, companies may try to pass on the burden of increased input costs to consumers by raising prices, which would push inflation higher.
What’s more, at a time when food inflation is sticky and elevated, another surge in crude prices may prompt the Reserve Bank of India (RBI) to further delay a rate cut.
“Clearly, the upswing in crude oil price is a supply-side shock for RBI and other EM (emerging market) central banks. Historically, every $10 per barrel increase in Brent crude pushed up retail inflation in India by 35 basis points," said Rahul Bajoria, managing director & head of EM Asia (ex-China) economics, Barclays. One basis point is one-hundredth of a percentage point.
Interestingly, Indian stock markets have remained rather resilient despite rising oil prices. The key benchmark Nifty 50 index crossed 20,000 points a few days ago, and remains around this mark.
But this does not mean all is hunky-dory. If crude hits or surpasses the key psychological mark of $100/barrel, that could be a sentiment dampener and lead to a knee-jerk reaction, said analysts.
Rich valuations, worries on oil, the fiscal situation and near-term state elections could raise market volatility, Jefferies India said in a report on 18 September.
Speaking of valuations, the MSCI India index is trading at a one-year forward price-to-earnings multiple of 19.5x, a premium to Asian peers, showed Bloomberg data.
To be sure, India is considered relatively better placed than other Asian economies with a firmer macro-economic position.
But the worry here is that surging crude oil prices, especially in the run-up to general elections, could trigger increased outflows by foreign institutional investors in Indian equity markets.
In this backdrop, investors will watch if crude oil prices continue to inch up.
