Dealing With Market Flip-Flop
Indian investors predicted oil surging to $100 per barrel in international markets. India being a net importer, it was considered as a major problem. The rupee touched historic lows and oil prices were soaring. The government was asked to cut duties on fuel by the opposition.
Cut to today
There is a dramatic change in the external situation. Oil prices have tumbled from record highs in international markets. Fuel prices have been cut to some extent by the government. The Indian rupee is off record lows.
The above sequence followed a rally in the market that took benchmark indices to a record high.
Crude is not bad now
The recent global crude oil price fall is a big positive for India’s macroeconomic position, assuming oil prices stay at current levels. India’s external position depends significantly on oil given its influence on several key variables—a US$10/bbl change in crude oil prices results in 50 bps (or 0.50%) impact on the current account deficit. Oil prices are down over $20 a barrel. Over the last one year , the global per barrel Brent crude oil prices have fallen from about $97 to about $75. This decline is going to reflect in petrol and diesel prices in India, to a considerable level. As a result, the airline and logistics companies are going to get benefitted. Low fuel prices induce a higher consumption of goods. This will have a positive impact on the overall sentiment in the market. The Government of India is also moderately positive about the changes.
The Stabilizing Rupee
A few months ago, as oil prices touched new peaks, rupee value touched new lows. As crude oil slipped to new lows, rupee became stronger. As the import cost gets reduced, the stress on foreign currency flows eases. This has a positive impact on the current account deficit and it is likely to narrow if prices remain low. This results in reduced demand for foreign exchange and a rupee appreciation. Cheaper imports also benefit industries importing raw materials for production. This will bring down their production cost and thus, increase the prices of their stocks. Two examples of such industries are the paint industry and the lubricants industry.
Further, stable macroeconomic conditions also attract foreign investors. As the foreign investors gain confidence, India’s balance of payments position improves. Foreign investors have been net buyers in Indian equity markets in November 2018.
IT and Pharma Stocks
The Indian IT sector, heavily reliant on exports, has experienced fluctuations due to changes in the rupee's value. Recently, IT giants like Infosys, TCS, HCL Tech, Tech Mahindra, and Wipro saw their stock prices decline significantly on September 18, 2024. This drop was influenced by market speculation surrounding the US Federal Reserve's anticipated rate cut, which could strengthen the Indian rupee against the dollar and negatively impact IT stocks that benefit from a weaker rupee.
The Reserve Bank of India (RBI) has been actively managing rupee volatility. The RBI has intervened in the foreign exchange market by selling US dollars to stabilise the rupee amid pressures from rising US interest rates and capital outflows.
Despite these challenges, there have been instances of recovery in IT stocks. For example, on August 14, 2024, major IT stocks like TCS and HCL Tech experienced gains due to a rebound in US markets. However, the broader trend remains cautious as global economic uncertainties continue to influence investor sentiment.
Conclusion
While the fall in oil prices comes as a relief and has strengthened the rupee, the volatility has impacted sectors like IT and pharma that rely heavily on exports. The RBI faces the challenge of managing currency fluctuations to maintain economic stability. Though the current low oil price environment benefits India's macroeconomic position, the markets remain susceptible to global uncertainties. As an investor, you need to closely track developments and exercise caution amidst the unpredictability. It is a complex interplay of multiple factors influencing the Indian economy and markets. Prudent government policies, astute central bank intervention and wise investment decisions are key to navigate these choppy waters. The Indian growth story remains intact, but temporary turbulence requires patience and perspective from policymakers and market participants alike.
