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Dealing with market flip-flop
Just a few weeks ago, there were ‘doomsday sayers’ all around. They said the Indian rupee is all set to fall to Rs 80 to the US dollar. They 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.
Related read: 4 things to know about Sensex hitting an all-time high
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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 55 bps (or 0.55%) impact on the current account deficit. Oil prices are down over $20 a barrel. Over the last six weeks, the global per barrel Brent crude oil prices have fallen from $86.28 to $63.3. The price of Brent crude oil declined by 36.31%, between October 3 and November 21. 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.
Related read: The Impact of Crude Oil Prices on Indian Stock Markets
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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.
Related read: The positive side of rupee depreciation
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IT and Pharma Stocks
As the IT sector is intensely export based, the earlier fall in rupee value has given a considerable push to their earnings. A weak rupee has given a boost to prices of stocks of IT giants like Infosys, TCS, HCL Tech, Tech Mahindra and NIIT Tech. However, a rally in the rupee induced a fall in IT and pharma shares. The challenge for the Reserve Bank of India is to reduce the volatility in the currency markets. If the rupee value keeps appreciating sharply, RBI may have to make an intervention by buying US dollar and selling the rupee. Foreign investors and currency markets do not like volatility.
Related read: 5 things to learn from Infosys, TCS results
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$60
The price of Brent crude oil declined by 36.31%, from $86.28/bbl on October 3 to $63.3/bbl on November 21. As the price of crude oil declined, Indian rupee gained strength. This considerable decline in crude oil prices is going to have a positive impact on India’s current account deficit. It currently hovers around 2.5% of the gross domestic product but could narrow below 2% in 12-18 months if oil prices remain around $60 per barrel mark. This is good news for India’s rupee, inflation and interest rates.
Also read:
- What can you learn by analysing a company’s debt profile?
- What can you do when markets are volatile?
- Finding Value in Midcap Stocks
- Oil trade: Buy upstream companies, but avoid downstream stocks
- What can you learn by tracking bond yield movements?
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