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The Impact of Crude Oil Prices on Indian Stock Markets
The year ahead is fraught with challenges. Crude oil remains the most important one. As you revisit your investments or look to buy something new this Samvat, you need to understand the impact of oil prices.
A rise or fall in crude oil prices affects the prices of various commodities. An impact on the prices of commodities affects companies. The recent decline in the crude oil prices has helped improve investor sentiments in Indian markets.
Here are a few points that explain the impact of crude oil prices on the Indian stock markets:
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Current Account Deficit (CAD) and Rupee depreciation:
Every U$10/bbl increase in oil price leads to a 0.55% or 55 bps increase in the current account deficit. Crude oil is one of the most important commodities in recent time. India is one of the largest importers of oil in the world. It imports more than three-fourths of its oil needs. Therefore, a fall in the price of crude oil will have a positive impact on India’s current account deficit situation. Lower CAD will mean reduced stress on foreign currency outflows. This, in turn, may lead to rupee appreciation. If the value of rupee appreciates, the imports become cheaper. This will affect the companies who depend on import crude oil and other raw materials, for their business. The price of stocks of these companies will thus experience a rise.
Related read: 5 ways falling oil prices affect India
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A rise in the cost of production:
Companies like tyre, lubricants, logistics, footwear, refinery, and airlines hugely depend on crude oil prices. Further, products like paints too will benefit from reduced crude oil prices. This is because; most paints used today are oil-based. A fall in crude-oil prices affects the input cost of producing these goods. Thus, a fall crude oil prices have a positive impact on the stocks of these companies.
Related read: 3 reasons rising oil prices bother India
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A rise in the transportation cost:
A rise or fall in crude oil prices affects the transportation cost of goods. Crude oil prices have a considerable impact on the prices of consumer durables. These products are manufactured in industrial units and then sold in various cities across India. A fall in the logistics cost of these goods will bring down their final price. A fall in prices of consumer goods raises its demand and thus its stock price.
Related read: Fuel prices on fire: The what, why, how and what now
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Inflation:
Every US $10/bbl increase in oil price will result in a 0.3% or 30 bps increase in CPI. Crude oil has an impact on the prices of all goods and services. Agricultural commodities or manufactured goods, oil prices affect their MRP. A considerable fall in prices of goods and services will ease inflation. Inflation is often perceived negatively by an investor. Thus, a comparatively lower inflation level will be beneficial for the stock market.
Related read: How high crude oil prices and Iran dilemma will impact India
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20%
Brent crude crossed the $86 per barrel mark, in October 2018. This was for the first time in nearly four years. However, it is trading at $71 per barrel, a nearly three-month low. Therefore, the international benchmark has fallen nearly 20% in the past one month.
Also read:
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- Oil trade: Buy upstream companies, but avoid downstream stocks
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