Mumbai: Indian stocks fell amid fears that surging crude prices will intensify an economic slowdown even as Asia’s third-largest economy, which imports most of its oil, stepped up efforts to secure supplies after the disruptions caused by last week’s drone attacks in Saudi Arabia.

A fragile global economy and escalating geopolitical tensions in West Asia added to the bearish sentiment, with the benchmark BSE Sensex plunging 642.22 points, or 1.73%, to 36,481.09 on Tuesday.

The surge in crude prices and the consequent increase in India’s import bill added yet another worry for the government that is trying to combat an economic slowdown. GDP growth crawled to just 5% in the June quarter, the slowest pace in six years. Growth has decelerated for five straight quarters to the weakest level since 2013.

Russia’s Rosneft on Tuesday said it will help India with its energy security efforts against the backdrop of the biggest ever disruption in oil supplies. This was articulated by Igor Sechin, chairman of Rosneft during a meeting with oil minister Dharmendra Pradhan in New Delhi. Crude prices have gained 13.2% in the past two days. It fell 5% on Tuesday.

Saudi Arabia, however, claimed that output was recovering faster than initially forecast and that it could be fully restored in two or three weeks, Reuters reported, citing unidentified people in the kingdom.

Still, higher crude prices may result in rising risks of fiscal slippage for India and hurt profit growth of companies, analysts warned.

The sell-off in local stocks for the second straight day resulted in complete erosion of the previous week’s gains, said Nischal Maheshwari, chief executive of institutional equities at Centrum Broking. “The sudden spike in oil prices on account of drone attacks on Saudi Arabia establishments has definitely disrupted sentiments as it tends to adversely impact current account and fiscal deficit, thereby deterring the path of recovery for an economy that is already immersed in a slowdown," he added.

(Graphic: Sarvesh Kumar Sharma/Mint)
(Graphic: Sarvesh Kumar Sharma/Mint)

Higher oil prices weaken growth, drive up inflation and impair the fiscal and current account deficits. Reserve Bank of India (RBI) governor Shaktikanta Das cautioned that India’s current account and fiscal deficits could worsen if oil prices remain at an elevated level.

Investors are also concerned that a flare-up of inflationary pressures may derail the central bank’s easing cycle, even as corporates wait for liquidity to surmount the economic slowdown and repay outstanding debts in the face of shrinking revenues.

In times like these, investors seek safe havens, and foreign portfolio investors have been on a selling spree. They have sold Indian shares worth $524 million so far in September. Between January and July, they were net buyers of close to $11.5 billion, but have sold $4.66 billion since then. Incidentally, domestic institutional investors have been net buyers, purchasing 6,758.39 crore worth of equities in September; during the year so far, their purchase bill works out to 40,477.42 crore.

The Indian rupee was weaker against the dollar, tracking emerging market currencies following the drone attacks on Saudi Arabia. The domestic currency ended at 71.79 a dollar, down 0.26% from its close of 71.60 on Monday. The local currency opened at 71.83 and touched a low of 71.98 during trading hours.

According to Nomura Research, every $10 per barrel rise in oil price would reduce GDP growth by around 0.2 percentage points, widen the current account deficit by 0.4% of GDP, widen the fiscal deficit by 0.1% of GDP and add 30 basis points (bps) to headline retail inflation. Additionally, if higher oil prices result in rupee depreciation (against the dollar), then it estimates that for every 5% rupee depreciation against the dollar, headline inflation would increase by 20bps.

“Given weak demand, higher oil prices, even if temporary, can result in a stagflationary outcome. Finally, India’s basic balance of payment remains negative, and higher oil prices should worsen the current account deficit beyond our current base case of 2% of GDP in FY20," it said in a note on 16 September.

Kalpana Pathak contributed to this story