Amid US Fed rate, oil, inflation concerns, Credit Suisse cuts India’s position to Underweight

US Fed rate hikes along with concerns over rising oil prices and inflationary pressures are likely to impact the Indian stock markets, global financial services company Credit Suisse believes. As a result, it has downgraded the India’s outlook from Overweight to Underweight stance.   

Oil prices and higher sensitivity due to Fed rate hikes are the key concerns the Indian markets and economy is likely to undergo, it says.

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Oil is the main concern driving our cut of India to Underweight, the brokerage said. Even before Ukraine, higher oil prices had seriously dented the trade balance, pushing the deficit down from US $41 billion in CY1Q21 to US $61 billion in fourth quarter, it added. 

Credit Suisse India strategist, Neelkanth Mishra estimates Brent crude at USD 120 per barrel and could potentially add USD 60 billion to India’s import bill. “Price rises for gas, coal, edible oils and fertilizers could add another US $35 billion. In total, the current account mat fall around 3 per cent of GDP.” 

If Brent crude remained at USD 120 per barrel, India’s current account would weaken by almost 3 pp of GDP, Credit Suisse said in its report, “The market’s big P/E premium magnifies the risks.” The same was quoted by Kotak Institutional Equities earlier this week in its report on India’s outlook.

The brokerage firm states that because of India’s strong structural prospects and robust EPS (Earning Per Share) momentum, we will look for opportunities to re-enter the market.  

However, it tactically cuts the position due to “Higher oil prices that could hurt the current account, add to inflationary pressures and increase sensitivity to US Fed rate hikes.” 

Another old bugbear—inflation—also becomes more worrisome with higher oil. Mishra calculates, if Brent stayed above US $120/bbl for a year, it could add 100 bp+ to inflation and subtract 2.5-3 pp from GDP. “India becomes more sensitive to bond yields when current account weakens,” it said.