The prices of crude oil could play a key role in the performance of Indian equities in the next few months amid concerns over widening of conflict in West Asia. Any sharp spike in crude oil prices can accelerate the outflow of funds from foreign investors and turn India into an underperformer among emerging market (EM) peers, market participants said.
So far in 2024, India has been a best performer among EM peers with equity returns of over 16%. However, equities in China have seen a sharp rally in the last few weeks, driven by stimulus measures to boost economy and attractive valuations.
In three sessions since the tensions in West Asia started escalating and stimulus measures announced by China, FPIs have sold over Rs 26,870 crore worth of shares in India.
On Thursday, benchmark indices Nifty and Sensex recorded an over 2% fall to close at their lowest levels in three weeks amid aggressive selling by FPIs. “If tensions in West Asia escalate from Iran’s side, there could be supply disruption in oil. This would impact emerging markets, particularly India due to its expensive valuations,” said Shrikant Chouhan, executive VP and head of equity research at Kotak Securities.
G Chokkalingam, founder and head of research at Equinomics Research, said if oil prices shoot up 15-20%, then India could be worst affected among emerging markets.
So far this week, crude prices have risen over 4% to $75.6 a barrel. Some marker participants were surprised with the relatively modest rise in the prices, but said this could be an indication that experts do not see the conflict widening in the region.
Experts said that if crude prices do not surpass $80 per barrel, India is likely to remain an outperformer despite the relatively high valuations.
Chokkalingam said the good monsoon, crop output and strong macroeconomic factors will likely provide a support to Indian equities.
Vinit Sambre, head-equities at DSP Mutual Fund, too, said that though the flare-up in oil prices could be a short-term challenge for India, the long-term growth potential will help retain investor interest compared to other emerging markets.