EFFECT OF CRUDE OIL PRICE ON INDIAN STOCK MARKET
Crude oil is one of the most important commodities we use in our daily life. Moreover, crude oil remains the biggest import category in India. In India, we import 86 per cent of our annual crude oil requirement. Thus the rise or fall in crude oil price will reflect in the economy and the stock market.
Let’s have look on few points that describe the impact of crude oil prices on the Indian stock markets.
Impact on Cost of production
Most of the companies directly or indirectly depend upon crude oil price. A fall in crude-oil prices reduces the input cost of production in companies like tyre manufacturers, footwear, lubricants, paints, and airline companies. This makes a positive impact on the stocks of these companies.
Impact on transportation cost
A change in crude oil prices affects the transportation cost of goods. Crude oil prices have a considerable impact on the prices of goods and services. These products are manufactured in industrial units then transported and sold in various cities across India. So transportation cost is significant in such commodities. A fall in the production cost of these goods will reflect their final price. A fall in prices of consumer goods raises its demand and thus its stock price.
Impact on Inflation
The rise in the crude oil price has an inflationary effect in an economy in long run. Because when the price of crude oil increases, it increases the cost of goods and services. This reduces the purchasing power of money. Inflation is often negatively affecting investors. Thus, lower inflation level is always beneficial for the stock market.
Current Account Deficit (CAD) and Rupee depreciation
Crude oil is considered to be one of the most significant commodities in recent time. India is one of the largest importers of oil in the world. We import more than three-fourths of our oil needs. Therefore, a fall in the price of crude oil will have a positive impact on India’s current account deficit (CAD) situation. A current account deficit happens when a country spends more money on imports compared to the money it receives for exports. Lower CAD will reduced stress on foreign currency outflows. This, in turn, may lead to rupee appreciation. If the value of rupee appreciates, the imports become cheaper. This will affect the companies who depend on crude oil. The price of stocks of these companies will thus experience a rise.
Recently there is a fall in crude oil price. This makes a positive impact on the Indian economy as well as the stock mark. Falling crude oil prices have been a boon for Indian policymakers and a key factor for the domestic macroeconomy. The biggest beneficiaries in this scenario are companies in sectors such as oil marketing, paint, tyre, speciality chemical, plastic piping, aviation and cement, etc. as most of them use crude oil as a raw material.