New Delhi, 11 September (H.S.): Crude oil prices in the international market have been surging at a rapid pace amid the ongoing tensions in West Asia. Brent crude moved close to the $110-per-barrel mark on Thursday, while West Texas Intermediate (WTI) crude also came close to the $105-per-barrel level. The sharp rise in crude oil prices is raising concerns over a significant adverse impact on the Indian economy. The surge is expected to fuel inflation while also increasing the risk of further weakness in the rupee.
Following the escalating direct military confrontation between the United States and Iran and attacks on oil tankers in the Strait of Hormuz, crude oil prices in the international market have climbed to their highest level in four months. India imports around 85 percent of its crude oil requirements. Market experts say that as one of the world’s major oil-importing countries, India is already beginning to feel the direct impact of rising crude prices on the stock market, the value of the Indian rupee and the domestic economy.
Tarakeshwar Nath Vaishnav, CEO of TNV Financial Services, said the first and most significant impact of expensive crude oil has been felt by the Indian currency. Indian oil companies have had to substantially increase their demand for dollars to meet their oil import payments. The surge in dollar demand pushed the Indian rupee to a record low of 95.80 against the US dollar.
Although the Reserve Bank of India has been continuously trying to support the rupee by releasing dollars from its foreign exchange reserves into the currency market, sustained crude prices at these levels could put further pressure on the rupee. More importantly, if the Reserve Bank increases the flow of dollars into the currency market substantially, the country’s foreign exchange reserves could come under severe pressure.
Vaishnav said the impact of the oil crisis triggered by rising tensions in West Asia is also clearly visible in the Indian stock market. Several major sectors are witnessing intense selling pressure amid concerns over higher costs and shrinking profit margins. The BSE Sensex fell by more than 740 points during intra-day trading on Thursday. Later, renewed buying support provided some relief to the market. However, the rise in crude oil prices is also directly benefiting shares of the oil and gas sector.
Similarly, Ravichander Khurana, CEO of Khurana Securities and Financial Services, said domestic oil marketing companies are likely to be among the biggest casualties of the surge in international crude oil prices. The increase could force oil marketing companies to raise prices of petrol, diesel, compressed natural gas (CNG), piped natural gas (PNG) and liquefied petroleum gas (LPG). Likewise, higher crude prices could make aviation turbine fuel (ATF), used as jet fuel, more expensive, potentially worsening the situation for the country’s aviation sector, which is already under pressure.
Experts believe the rise in crude oil prices could deliver a double blow to the paint and plastics industries. Crude oil is one of the key raw materials for these sectors. Higher oil prices could sharply erode their profit margins, prompting companies operating in these industries to raise the prices of their products.
Ravichander Khurana said that while the possibility of higher inflation remains a concern, shares of domestic crude oil producers such as ONGC and Oil India Limited could witness strong gains. At the same time, as conventional fuels such as petrol and diesel become more expensive, investors could increasingly turn their attention towards the renewable energy sector, including solar and wind power companies such as Tata Power and Adani Green.
Experts said that if elevated crude oil prices in the international market persist for an extended period, India’s current account deficit could widen. It could also make it more difficult for the government to meet its fiscal deficit target. In addition, higher crude prices could accelerate foreign capital outflows from the stock market. Mounting pressure on the economy could also force the government to take difficult decisions concerning subsidies, interest rates and the impact on the rupee-dollar exchange rate.
Market experts said crude oil prices remaining at $100 per barrel or above for an extended period would have the most significant impact on inflation. Higher fuel costs would increase freight and transportation expenses, which would ultimately become a major driver of retail inflation. More expensive freight would raise the prices of vegetables, fruits, medicines and other everyday essentials, putting further strain on household budgets.
At the same time, a widening current account deficit could cause India’s GDP growth rate to slow for some time. Thus, a prolonged period of elevated crude oil prices could pose a substantial challenge to the country’s inflation outlook, external balance, currency stability and overall economic growth.
Hindusthan Samachar / Jun Sarkar
