sustained-oil-prices-may-pressure-indian-equity-market

A prolonged surge in global crude oil prices could pose significant challenges for India's economy, equity markets and the rupee, while creating a mixed outlook across sectors, according to market experts. While industries heavily dependent on fuel and petrochemical inputs may face mounting cost pressures, businesses linked to renewable energy, electric vehicles (EVs) and upstream oil exploration could emerge as beneficiaries.

Brent crude crossed the USD 100 per barrel mark on Friday for the first time since May 26, driven by escalating geopolitical tensions in the Middle East. The latest spike followed reports that Iran-backed Houthi rebels had attacked two Saudi oil tankers in the Red Sea, raising concerns about potential disruptions to global oil supplies.

Oil prices have climbed more than 30 per cent this month as geopolitical risks intensified across the region. At the time of reporting, Brent crude was trading at around USD 99.85 per barrel, while U.S. crude was quoted at approximately USD 91.27 per barrel.

The rally in crude prices has already begun to weigh on Indian financial markets. Benchmark equity indices Sensex and Nifty declined for the fifth consecutive trading session, reflecting investor concerns over rising inflation, higher import costs and potential pressure on corporate earnings.

The Nifty Oil & Gas index also traded in negative territory, falling around 0.45 per cent to 11,078.65, while the broader index had declined nearly 1.95 per cent during the session.

Commenting on the implications of Brent crude crossing the USD 100 mark, Manoranjan Sharma, Chief Economist at Infomerics Valuation and Rating Limited, said a sustained increase in crude prices could have wide-ranging consequences for India's economy and financial markets.
"A sustained rise in Brent crude above USD 100 per barrel would significantly dampen Indian equities, the rupee and macroeconomic stability, while creating sharp sectoral divergences," Sharma said.

He explained that higher oil prices would substantially increase India's import bill, widen both the trade deficit and the current account deficit, and revive inflationary pressures. These factors, he noted, could compress market valuations, increase volatility and make foreign institutional investors more cautious about investing in Indian equities.

"India's eroded macro-stability premium could also delay earnings-led rerating," Sharma added. Despite the broader challenges, Sharma believes certain sectors could benefit from elevated crude prices. Upstream oil and gas exploration companies, select energy-service providers and businesses associated with renewable energy and electric mobility stand to gain from the changing energy landscape.

On the other hand, industries that consume large quantities of fuel or petrochemical products are likely to experience margin pressure. These include oil marketing companies (OMCs), aviation, paints, chemicals, automobiles, logistics and several manufacturing businesses unless they are able to pass on higher costs to consumers.

Sharma also warned that persistently high oil prices would intensify demand for U.S. dollars, putting additional pressure on the Indian rupee.
"Prolonged prices above USD 100 would intensify dollar outflows and exert downward pressure on the rupee. The RBI may need to balance foreign-exchange intervention with a tighter monetary stance to contain imported inflation and preserve external stability," he said.

He further described elevated oil prices as a "stealth tax" on a net oil-importing country like India, as they raise transportation and production costs, reduce consumers' purchasing power and could eventually slow both consumption and private investment.

Offering a similar perspective, Sourav Choudhary, Managing Director of Raghunath Capital, said he does not expect Brent crude to remain significantly above USD 100 per barrel unless geopolitical tensions worsen further or global oil supplies face prolonged disruptions.
"Unless there is a prolonged disruption to oil supplies or a meaningful escalation in geopolitical tensions, Brent crude sustaining well above USD 100 per barrel appears unlikely," Choudhary said.

He noted that aviation, paints, chemicals, tyre manufacturers, logistics operators, cement companies and other energy-intensive industries would likely see profitability come under pressure if elevated oil prices persist.

Conversely, he said upstream oil exploration and production companies are expected to benefit from stronger crude price realizations, while selected oilfield service providers could also witness improved earnings. Meanwhile, Swarnendu Bhushan, Co-Head of Research at PL Capital, highlighted the contrasting impact on different segments of the oil sector.

 

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According to Bhushan, higher crude prices would further strain already loss-making oil marketing companies, particularly if they are unable to fully pass on increased costs to consumers. "Rising oil prices would worsen the already loss-making oil marketing companies and they are expected to remain under pressure if oil prices remain strong," he said.

However, Bhushan pointed out that refinery margins could remain favourable due to higher product cracks resulting from supply disruptions.
He added that independent refiners such as MRPL and Chennai Petroleum are likely to continue reporting healthy financial performance, while the refining businesses of larger oil marketing companies may also benefit despite challenges in their fuel retailing operations.

As global energy markets remain highly sensitive to geopolitical developments, investors will closely monitor crude price movements in the coming weeks. A sustained rise above the USD 100-per-barrel mark could have far-reaching implications for India's inflation outlook, currency stability, corporate earnings and overall economic growth, making oil prices one of the key variables shaping market sentiment in the near term.