Impact of rising Crude oil prices on the Equity market
On Tuesday, the crude oil price jumped by 3.8% to $98.9 per barrel. The current rise in oil prices is because of the conflict between Russia and Ukraine. When crude oil prices increase, investors read reports of the Indian equity market not doing well. Let us try to understand how crude oil prices impact the Indian equity market in a simple language:
India is a net importer of crude oil - Most of you would know India is the net importer of crude oil. As per recent data, India imports 86% of its annual oil requirement. The payment for these import bills is in US dollars. The Indian deficit depends on crude oil prices and the exchange rate between the two currencies. When there is a large outflow of US dollars (paying the bills), the rupee depreciates. As Rupee depreciates, the FII withdraws money from the Indian market (book profits) since they benefit from rupee depreciation also.
Direct impact on some sectors - Companies like refinery, footwear, paint, logistics, tyre, etc, are dependent on oil prices. For example, crude oil is the raw material for paint companies. When crude oil prices increase, the raw material cost for these companies will increase. Hence, the profit margins of paint companies will decrease. When a company reports lower profit margins, you know the impact.
Transportation cost - The rise in crude oil prices affects the transportation cost of goods. Hence, companies from the FMCG sector are majorly impacted. Consumer Durables are manufactured in the industrial units and then transported to every corner of India. If the transportation cost increases, the margins of these companies will decline (unless they increase the product cost). Many FMCG companies and a large sector of the equity market get impacted.
Inflation - For every $10 increase in the price of crude oil, the Consumer Price Index (CPI) in India increases by 0.3%. The Reserve Bank of India (RBI) has to increase the interest rate to control inflation. With the interest rate increase, the bond yield increases. Investors get alternate investment opportunities and withdraw money from the equity market. Hence, rising crude oil price is never good for Indian equity.
Closing remark
Investors with large allocation in companies (sectors) that are heavily dependent on crude oil price fluctuation should keep a close watch on the oil price. Investors should look out for stocks in their portfolio that are and will be impacted by an increase in price. Before making a further investment (averaging out stock price), investors should take note of crude oil price movement.