Rough ride ahead
The rally in stocks over the past few weeks following the announcement of national elections was halted last week after the US announced that it was ending the significant reduction exceptions or the waiver on oil imports from Iran for eight countries including India, China and Japan. The loss of momentum is because of investor perceptions regarding a key macro risk that the country has encountered over decades — a surge in oil prices and its impact on India’s balance of payments and economic growth.
Brent oil is now over $75 a barrel as the oil markets have tightened, with Russia suspending exports to Europe, supply cuts by OPEC and with the US ending all exemptions as it pushes for zero oil exports from Iran. This in contrast to the scenario in November last year, when crude slipped to below $58 after having surged to $86 a barrel in October, reflecting the volatility and hazy outlook for the commodity; the rupee had then plunged to an all-time low of 74.39. The move by the US could put pressure on the rupee since India is one of the largest importers of crude: India sources over 20 million tonnes from Iran, which is the fourth-largest supplier to the country. The government has downplayed such concerns saying it has a robust plan in place to ensure adequate supply to refiners. Also, the US has indicated that there wouldn’t be any significant disruptions in the oil markets. Further, Saudi Arabia has said it will work with other oil producers to ensure adequate supplies and balance in the global oil market. It does help that a slump in global demand could act as a dampener to a potential spike in oil prices. The other positive is the US Federal Reserve has signalled that it won’t raise rates this year while the RBI has mopped up $20 billion through two dollar-rupee swap auctions, which should help boost liquidity.
Few governments in India have had the good fortune as the Narendra Modi-led NDA government to enjoy a decent streak of relatively low oil prices, which helped keep the twin deficits under control. Soft crude prices have meant low inflation, easing the pressure on the RBI and paving the way for cutting interest rates. From a broader perspective, oil prices, if they remain at elevated levels, could dent the prospects of a further lowering of interest rates, dampening sentiment and domestic investment, precisely at a time when the economy badly needs a booster shot.