If inflation surpasses RBI’s comfort level of 4 percent, chances of a rate cut will also vanish which could put further pressure on equities
In April, Indian market scaled record highs even as crude prices inched higher, now trading above USD 71/bbl (around November 2018 highs). Crude price rose from $53.80/bbl on December 31 to $71.64/bbl on April 17, an increase of over 33 percent.
Foreign investors poured money into equities on the back of renewed hopes of a stable government at the Centre after the elections and on another round of rate cut by the Reserve Bank of India.
So far, the Street has ignored all the headwinds but how long will that last? Can the rising global crude prices jolt the rally in the Indian market?
Experts feel that as long as crude is trading around $70/bbl, the market will remain stable, but a sell-off in equities could be seen if oil breaks past $80/bbl.
How crude prices affect India
A rise in crude oil prices not only leads to an increase in the raw material cost for companies (where it is used as a raw material) but also fuels inflation in the economy.
If inflation surpasses RBI’s comfort level of 4 percent, chances of a rate cut will also vanish which could put further pressure on equities.
India imports about 85 percent of its oil requirements. Higher oil prices have a multiplier effect as various numbers like the balance of payments, currency and current account deficit worsen.
“It is important to note that if rise in crude is accompanied by economic growth, the negative effects are offset by growth. Sentimentally, the threshold limit of $80 has seen sell-off in equities, currency, and bond market in the past, so that is the number to watch,” Prabhakar Kudva, Founder Director, Samvitti Capital told Moneycontrol.
“In the present scenario, if growth (both global and local) bounces back sharply the impact of crude could get negated, as it has happened in several bull markets in the past. A rough estimate suggests every $10 appreciation in oil price results in a 10 basis points jump in retail inflation,” he said.
Crude prices have an impact on inflation, bond yields, and currency.
The impact of crude oil prices will be more visible on India Inc. from Q2 onwards if crude prices remain at elevated levels, suggest experts
However, some businesses have pricing power and should be able to pass it on the end customers, hence one needs to take a stock-specific view.
“A lot of Indian companies depend on healthy crude oil prices, this includes tyre, lubricants, footwear, refining and airline companies whereas oil exploration companies in the country could benefit from a rise in oil prices,” Ritesh Ashar – Chief Strategy Officer – KIFS Trade Capital told businessleague
“We don’t see any reason to worry at this level for investors. In fact, India has the ability to perform well even at the level where crude price rises till $75/bbl. The real reason of concern for the investors would be near the level of $80/bbl which can be considered as the threshold level which could disrupt macros and hurt earnings,” he said.
Here is a list of 4 stocks from Ritesh Ashar that are crude price sensitive:
Castrol India
Base oil is the raw material for the company and hence it is dependent on the movement of oil prices and rupee against the US dollar.
Base oil is derived from crude oil, and makes up 53 percent of India’s total imports. So, the rise in crude oil price will impact the margins of Castrol.
Hindustan Petroleum Corporation
Rise in crude oil price will result in low earning growth in oil marketing companies. HPCL will be impacted negatively with the rise in the price of crude oil as it would result in a decline of its GRMs.
GAIL India:
Gail will benefit from higher crude prices as this will increase the utilization of petrochemical capacity and there will also be a boost in gas utilization thus increasing its complete energy imprint.
Oil & Natural Gas Corporation
Movement in oil prices and the government’s formula of subsidy sharing decides the performance of this counter. Looking at the current market scenario and the rise, which is already seen and expected, ONGC is one counter that will benefit from increase in prices.
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