Rising oil prices may take shine off Indian markets
MUMBAI: A steady rise in crude oil prices could take the wind out of the markets’ sails, analysts said, as rising risks of fiscal slippage, greater inflationary pressures and lower likelihood of a December rate cut prompt investors to review their positions.
Oil prices hit their highest since July 2015 on Monday as Saudi Arabia’s crown prince Mohammed bin Salman cemented his power over the weekend with an anti-corruption crackdown. Brent crude futures rose 47 cents to $62.54 a barrel, after hitting a session peak of $62.90, a 28-month high.
Despite oil’s rise, on Monday, the BSE Sensex rose 0.14%, ending at a record close of 33,731.19, having hit an intraday record earlier in the session.
Oil has risen for four straight weeks on signs that global inventories are shrinking and the Organisation of Petroleum Exporting Countries and allied producers will extend output cuts beyond their March expiry. Saudi Arabia has signalled firm support for an extension. In 2017 so far, crude prices are up 9.98%.
Higher oil prices will weaken growth, drive up inflation and worsen the twin deficits, fiscal and current account deficits, Japanese securities house Nomura Holdings Inc. said.
“We estimate that every $10 per barrel rise in crude oil price worsens the central government’s fiscal balance by 0.1% of gross domestic product (GDP). Every ₹1 per litre reduction in the excise duty on petrol and diesel lowers government excise collections by ₹13,000 crore (0.08% of GDP) annually,” Sonal Varma, managing director and chief India economist at Nomura, in a note on November 1.
When crude oil prices rise, the government at times reduces excise duty on auto fuel to soften the impact on motorists, sacrificing some of its revenue. The Indian economy grew 5.7% in the June quarter, the slowest pace in three years.
Analysts said that slowing growth may hurt investor sentiment and squeeze the liquidity that drove Indian stock indices higher this year, putting them among Asia’s best performing equity markets in 2017. Benchmark indices Sensex and Nifty have gained 26.7% and 27.7%, respectively, this year.
“Markets sentiment may turn negative in the initial phase when Brent crude goes above $60 per barrel,” said Rusmik Oza, head, midcaps, at Kotak Securities.
In November, FIIS have bought $399.56 million worth of Indian equities, while investing $6.21 billion in 2017. Domestic institutional investors have pumped in ₹71,847.98 crore this year but sold ₹1,091.02 crore worth of shares in November.