Impact of Crude oil and Rupee on Equity market

A big part of the oil requirements of India are met through oil imports. India has been among the top four oil importers globally, just after US and China. On an annual basis, India imports approximately 157.5 crore barrels of crude oil. Even a single dollar increase in price of crude oil can cause a damage of around 9500 crores to India, assuming rate of Rs. 60 to a dollar.

In order to ascertain the exact damage, it is essential to check if the US dollar is weakening or strengthening against the Indian rupee. If the rupee strengthens, the damage is limited even while the price of crude oil appreciates. On the other hand, the strengthening of dollar along with an increase in crude oil prices makes the situation painful for the Indian economy.

A regular and persistent rise on crude oil prices starts to show its impact on the economy. The Forex reserves come under pressure and the current account deficit widens. This in turn makes the foreign investors cagey on the growth potential of the market. Continued persistence of such a scenario may induce the foreign investors to accelerate their redemption for the equity market.

A long term rise in crude oil prices often indicates a subdued equity market despite visibility in earnings growth.

On the industry front, the rise in crude oil prices and its derivatives significantly raises the raw material cost that impacts their profits. Oil marketing companies and aviation players are some of the key sectors that are negatively affected by falling rupee and rising crude oil prices. Packaging and paint industries also bear an indirect negative impact.

It is advisable for the equity investors to maintain a cautious approach during times of rising oil prices and falling rupee. Their capital may be eroded due to various developments across domestic and overseas market and they are therefore advised to invest in quality stocks that are scalable and have robust earnings growth visibility along with strong corporate government track record. Equity investors should concentrate more on export-oriented companies in such a scenario. Most IT and Pharma companies are the primary beneficiaries of falling rupee.

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