InvestorQ : How do you see the higher crude prices impacting India? Do you see a negative impact?
Dilmini Mercia made post

How do you see the higher crude prices impacting India? Do you see a negative impact?

Dawn Cherian answered.
2 years ago

You would have often noticed that Indian stock markets tend to gain when oil is rising rather than when oil is falling. Why does this happen. There are a few reasons for this behaviour. Any spike in oil prices globally is seen as a signal of improvement in growth. Secondly, most of the heavyweight stocks in India benefit from higher oil prices. Let me explain.

For example, Nifty and Sensex derive a chunk of their market cap weight from oil price dependent companies. These include Reliance Industries, ONGC, BPCL, IOCL, GAIL etc. Upstream oil companies benefit from better price realization. The downstream oil companies gain from improved GRMs and better marketing margins. That boosts Nifty.

However, at the end of the day, the stock market is not everything under the sun. For example, in Dec-20 the trade deficit is estimated at $15.8 billion. That will certainly put pressure on the current account, which has been in the positive for 3 quarters in succession. This could also have a negative impact on the value of the rupee.

The other significant impact of high oil prices will be on inflation, due to the strong externalities of oil. Since the year 2015, the Indian government has literally earned billions of dollars by hiking duties on petrol and diesel even in falling crude prices. While people were denied the benefit of falling oil, they may not end up paying the price of rising crude as the restricted fiscal leeway will tie down the hand of the government.