What
happened to Crude Oil?
Brent
oil prices which has been on an upward trajectory since October 2019 end
(rising from ~60 US$/bbl to ~65 US$/bbl) spiked last week on the news of US
attack on Iran – up ~5% to ~69 US$/bbl. Although demand supply equilibrium does
not warrant a sharp change in prices, this event may lead to short term spikes
in oil prices. Everyone is now anxiously watching out for any response from
Iran and other developments in relation to this event.
Is
it Really Important for INDIA?
As
India is a net oil importer with inelastic demand, higher global crude oil
prices could undermine macro fundamentals. Looking at India’s oil price
sensitivity, a US$10/bbl oil price rise would have the following impact:
- Increases India’s CAD by US$15bn (0.5% of GDP) and fiscal deficit by 0.1% of GDP if domestic fuel prices are unchanged.
- A 10% average crude oil price rise could increase CPI inflation by ~25bps (CPI basket has 2.3% weight for petrol and diesel), in our view, and would dent GDP growth by 10 bps if the fuel cost is passed on to consumers.
- Every Rs1/litre cut in the excise duty reduces government revenue collection by US$1.5bn (0.06% of GDP).
- Historically, oil price increase has had negative impact on INR.
Historic Performance
Impact
on Indian Equity Market
As
we can see that Nifty performance has no correlation in the long term to crude
oil movements. In fact Nifty has reacted positively to rising crude holding
other things constant. We should continue to keep our portfolio positioning
unchanged as we believe that these developments may be transitory in nature. We
although continue to keenly monitor the event and any development to the same.
Bond
market impact
While
the longer term impact on rising oil prices is negative for the bond market
(higher yields – on account of the inflationary and/or fiscal impact, as well
as reduced FII buying interest when INR depreciates), as with most of these developments,
the markets will look at whether this development is going to be a temporary or
a permanent one. The market expectation is that the geopolitical noise will
gradually subside (and that is the key), and that the fundamentals of demand
supply dictate that oil prices will moderate.
In
fixed income, our portfolio will remain focused on domestic developments
including fiscal deficit, RBI’s twist purchases, drivers of local inflation but
will continue to keep a watch on international developments.
Sources:
Various publications
Disclaimer: The
information provided herein is based on publicly available information and
other sources believed to be reliable, but involve uncertainties that could
cause actual events to differ materially from those expressed or implied in
such statements. The document is given for general and information purpose and
is neither an investment advice nor an offer to sell nor a solicitation. While
due care has been exercised while preparing this document, we do not warrant
the completeness or accuracy of the information. We will not accept any
liability arising from the use of this material. The recipient of this material
should rely on their investigations and take their own professional advice.
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