Crude Oil prices corrected by about 30 percent from the highs of $86/bbl recorded in October, while Nifty fell from 11,000 levels to bottom out at 10,000 levels and is now trading near 10,700 levels.
Ideally, Indian markets should rally when crude falls because it has an important bearing on our fiscal math. But, history proves otherwise. In that case, can we say that both crude oil and Nifty are indirectly proportional?
Well, anecdotal evidence suggests that crude oil and Nifty do share a correlation most of the time, suggest experts.
“At a glance, Nifty50 index and Brent Crude futures seem to move in tandem. However, they are not statistically correlated. The maximum correlation observed was 50% (0.5) during 2010, when the crude futures had crossed the $90 mark,” Arun Kumar, Market Strategist, Reliance Securities told Moneycontrol.
“Nevertheless, a fall in crude price is deemed as positive for the Indian equities and a rise beyond a point is considered as negative for the local economy. Therefore, one has to look at a host of important macro-economic factors before concluding on the direction of crude prices against Nifty,” he said.
The movement of crude oil has important bearing on the Indian economy since our country is a net importer of oil and India Inc. uses the commodity as a raw material. The rupee also plays a crucial role in deciding the trends for market.
Crude oil prices and rupee, which were acting as a headwind for the economy and markets since October, turned into a tailwind in November. Lower crude oil prices are good for India but not so good for global growth because a fall in commodity prices is taken as a signal of weak global growth.
“Crude is a global commodity which has a direct relationship with the economic cycle of the world. As a result, crude prices and equity market move largely in line with the expansion and recessive cycle of the world economy, having a direct long-term effect on the Nifty,” Vinod Nair, Head of Research at Geojit Financial Services told Moneycontrol.
The long cycle has a direct correlation between the Nifty and crude prices, whereas in the short-term, it can have an inverse relation or the extent of reaction may not be completely in line.
“After going through the chart of 20 years we can say Nifty and crude oil share positive corelation for most of the time. Whenever Nifty has made new highs or lows, crude at the same time has made new highs and lows,” Viral Chheda, Sr Analyst, SSJ Finance & Securities.
Experts suggest that India outperforms other emerging markets when oil prices falls, and underperforms when prices increase depending on the global and domestic trend of the equity market.
But, ideally, both things should be studied separately, caution some experts. Because movement of the market is not determined by a single variable.
“Statistics don’t conclude any strong correlation. In fact, historically, crude and equity markets more or less have a positive correlation over the longer time period,” Mazhar Mohammad, Chief Strategist – Technical Research & Trading Advisory, Chartviewindia.in told Moneycontrol.
“For instance, between 1998-2000 Nymex Crude rallied from a low of US $10–37, and during this period Nifty rallied from 803–1,818,” he said.
He further added that between 2001 and 2008, light crude rallied from a low of $16–147. And, during this period, Nifty rallied from 849–6,357. Between 2009 and 2011, crude prices rallied from $32–114 and Nifty rallied from 2,539-6,300.
Same is the case on the downside.
Both equity markets and crude prices move hand-in-hand with each other. For instance, in March 2015 when Nifty topped out at 9,119 and corrected by around 25 percent, crude prices were down from $62–26, according to data provided by Chartviewindia.in.
“Hence, based on this data, we believe strong crude prices are an indication of a strong growth in the global economy. Therefore, if crude prices are down by 30 percent from recent highs of $76–52, it is something to worry about but not to celebrate,” concludes Mohammad.
