Tread with caution! Impact of crude oil @ $130 on markets, economy and rupee

As the Russia-Ukraine war is intensifying, a domino effect on equity markets, currencies, commodities is getting created across the globe. Crude oil has USD 130 a barrel, hitting a 13-year high and leading to a vertical drop in Indian equity markets.

The S&P BSE Sensex plunged by about 1500 points while the Nifty50 closed below 15,900 – a level last seen in August 2021.  

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A rise in crude oil prices will lead to a rapid rise in inflation and could force central bankers to raise rates earlier than expected. It will hurt the economy as well as strain the margin of companies where crude is a raw material.

Global oil prices have spiked more than 60% since the start of 2022, along with other commodities, raising concerns about world economic growth and stagflation, said a Reuters report.

Oil prices soared to their highest since 2008 on Monday, after the U.S. and European allies explored a Russian oil import ban, while delays in the potential return of Iranian crude to global markets increased supply fears, it said.

“India imports more than two-thirds of its oil requirements, and higher prices push up the country's trade and current account deficit while also hurting the rupee and fuelling inflation,” Vineet Bagri, Managing Partner- TrustPlutus Wealth, said.

Experts decode how higher crude oil prices will impact markets, economy, and rupee in the near to medium term:

Impact on Markets:

Indian market is already down by about 15 per cent from recent highs, and if crude oil sustains above $120-130 levels, then this correction could well stretch towards 20 per cent, suggest experts.

The Nifty50 is down by about 15 per cent from the recent high of 18,604 recorded in October.

Markets, economy, and rupee are interlinked and any adverse effect on any one of them will result in adverse impact on all three components.

“Higher crude oil prices cause a higher current account deficit and weak currency while inflation is a major headwind world is already facing,” Parth Nyati, Founder, Tradingo, said.

“Higher commodity prices are leading to sharp margin pressure on Indian Inc therefore we are seeing a sharp fall in the stock market. Historically, the Indian market witnessed 10-20% correction whenever crude oil prices surged furiously and our market already corrected more than 15% from its all-time high,” he said.

The market has already corrected significantly, and it may see a further correction if things don’t start cooling off on the geopolitical front.

Impact on Economy:

Crude at $130 a barrel will have an adverse impact on the Indian economy which imports more than 2/3rd of its requirement. Some economists estimate that a prolonged strength in crude could even lead to a rise in the current account deficit and a downgrade of GDP estimates.

Oil prices soared, momentarily reaching $139 per barrel, when the United States announced it was considering a ban on Russian oil imports.

“The impact on commodities, particularly energy, is the key source of concern for the Indian economy. Rising petroleum prices inevitably lead to a depreciation of the rupee, an increase in inflation and the budget deficit, and a slowing of GDP growth,” Kshitij Purohit, Lead Commodities& Currency at CapitalVia Global Research, said.

“A 10% increase in petroleum prices is predicted to lower GDP growth by 20 basis points, increase inflation by 40 basis points, and worsen the current account deficit,” he added. 

ICRA expects the Indian current account deficit to widen to 3.2% of GDP in FY2023 if the crude oil price averages US$130/bbl, crossing 3% for the first time in a decade.

“Moreover, the 10-year G-sec yield is likely to range between 7.0-7.4% in H1 FY2023, with the looming increase in supply. We now see large downside risks to our FY2023 GDP growth forecast of 8.0%, with higher commodity prices set to decimate margins,” added the report.

Impact on Rupee:

The rupee tanked 84 paise to close at its lifetime low of 77.01 (provisional) against the US dollar on Monday as intensifying geopolitical risks due to the Russia-Ukraine conflict pushed investors to safe-haven assets, said a PTI report.

On Friday, the rupee fell by 23 paise to close at 76.17 -- its lowest closing level since December 15, 2021. Experts see the weakness to continue in the near term.

“The fall in rupee has been rapid in last one week as the Crude price saw a rise of $30 plus in March month itself hence rupee has seen rapid fall below 77.00 from 75.50 in March already,” Jateen Trivedi, Senior Research Analyst at LKP Securities, said.

“The outlook remains weak for the rupee till the time Crude price stays above $105 hence opening weakness towards 78 in the near term. If the Crude prices start crossing $130 then the rupee can even touch $78.50 in a very quick time,” he said. 

(Disclaimer: The views/suggestions/advices expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)