Contrary to popular belief, the drop in crude oil prices can adversely impact global stock markets, including India. Soft crude prices are threatening growth in several oil-producing economies and this can have serious repercussions for India's foreign fund inflows as well as exports.
"Crude has created a lot of uncertainties in global markets which are adversely impacting the Indian market sentiment. The recent foreign fund sell-off in equities and decline in rupee's value can be attributed to this constant fall in crude prices," said Tirthankar Patnaik, India strategist and head of research of Mizuho Bank. "Hence, free-falling crude poses serious challenges for markets."
Market sentiment was further shaken after the International Energy Agency warned about potential financial defaults by Venezuela and Russia, while slashing crude demand forecast for 2015 to nine lakh barrels per day. Brent crude has tumbled 48% from its high in June this year to $60 a barrel on Friday.
Falling crude price means lower incomes for oil-exporting countries. This will slow down global demand, which will have an impact on Indian exports.
"The sources of funds that invest in India are primarily sovereign wealth funds, pension funds and insurance funds. If Norway, Saudi Arabia, Abu Dhabi, Qatar, or Kuwait are not going to see surpluses, then they will have less capital to send out, which means capital flows into India will not be as strong as they were," said Neelkanth Mishra, managing director and India equity strategist at Credit Suisse.
Foreign institutional investors have sold equities worth about Rs 1,850 crore in the past four trading sessions in India. The rupee hit a 10-month low of 62.50 against the dollar on Friday, on concerns over slower foreign fund flows.
In fact, FII inflows have hit a speed-breaker with only $17 billion investment into Indian equities this year so far, despite markets hitting new highs. India got more than $20 billon in 2013 and $24 billion the year before in FII investments.
"Weak global demand will hurt Indian exports as well, while capital flows will get impacted, too. I do not think decline in crude prices will boost the currency or balance of payment situation," said Mishra.
Analysts say with an expected rise in US interest rates, there are high chances of a significant decline in demand for the rupee from FIIs, leading to further depreciation of the currency.
"The depreciation of the rupee is lesser compared to most of the countries. However, if there is a sharp depreciation in currency, then there will be an impact on global fund flows to our markets," said Sanjay Dongre, fund manager at UTI Asset Company.
Source:economictimes.indiatimes.com
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