Even though a combination of domestic and global factors has contributed to the latest correction in the Indian equity market, the Street is also closely watching the momentum built up in crude oil prices. After falling to their lowest in six years in early January, the brent prices have rallied nearly 40% to $65 a barrel. Experts believe that at a time when the rupee has started losing its strength, a substantial rise in crude oil prices could keep the equity market in check.
According to Sampath Reddy, CIO, Bajaj Allianz Life Insurance, while a jump in crude oil prices towards $100 could obviously have a strong negative bearing on the market, a rally beyond $70 could also weigh on the market sentiment.
“Even if prices go towards $70-75 levels, that will put some pressure on the market by impacting sentiment. In next one-and-a-half month, if it rises by another $5, it can hurt us because we are a significant beneficiary of crude oil.
Had it not fallen towards $50, our markets may not have seen the highs it did, although a change in the government at the Centre also added to market momentum,” said Reddy.
Generally, lower crude oil prices is considered good news for the Indian market since they have a three-fold impact on the economy. Falling crude oil has a positive impact on inflation as diesel and petrol prices have a significant weight in the Consumer Price Index (CPI ). Lower crude oil prices also cushion India’s twin deficits. Estimates show that a $10-per-barrel fall in crude prices brings down India’s current account deficit (CAD) by 0.4% and lowers fiscal deficit by 0.1% after the diesel and petrol prices are de-regulated.
According a research note released by Bank of America Merrill Lynch last year, there is a strong long-term correlation of 93% between Indian stock market and crude oil. An earlier analysis done by FE showed that in the last nine years, whenever the quarterly average price of crude oil remained above $70, Sensex reported negative to muted returns for nearly half of these instances.
However, experts do not consider crude as a key market moving indicator in the near term, as they expect earnings recovery and economic growth to continue to lead the market sentiment.
Also, a nearly 50% plunge in the crude prices last year is seen reflecting a fundamentally negative trend for the commodity, and analysts continue to remain bearish on the price trajectory of crude oil. Compared to $99 a barrel in 2014, so far in 2015, crude oil prices have averaged $56.4.
“We expect crude oil prices to maintain a downward bias for the year. Even if prices rebound towards the $70 mark, we expect the structural downtrend to continue. Crude oil is not likely to be a major negative surprise for the Indian market. Growth expectations and a risk-off trade triggered by a global event are seen as key catalysts for the market,” said Vaibhav Agarwal, VP-research, Angel Broking.