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Stocks, rupee slip on Saudi oil slick

Mint, Sep 16, 2019

• Crude prices rising by a dollar would increase India’s import bill by roughly $1.6 billion a year, according to an estimate

• On Monday, the Indian rupee weakened 0.94% to close at 71.60 a dollar

Mumbai: India’s rupee weakened and stocks declined after drone attacks on Saudi Arabia’s oil facilities sent crude oil prices surging by the most on record.

Higher crude prices have stoked inflation and fiscal slippage concerns as India imports more than 80% of its oil requirements. Crude oil prices saw their biggest intraday gain on Monday, soaring nearly 20%. The attacks on Saudi Aramco’s oil facilities removed almost 5% of global supply.

They also heightened geopolitical tensions, which may now keep oil prices inflated. Higher prices will add to the pressure on the Narendra Modi administration, grappling with the slowest economic expansion in six years. India is among the most vulnerable to rising oil prices given its overwhelming dependence on imports, mainly from West Asia.

On Monday, the Indian rupee weakened 0.94% to close at 71.60 a dollar and the BSE Sensex fell 261.68 points, or 0.7% to 37,123.31.

In Asia, shares on Hong Kong’s Hang Seng index shed about 1%. Japan was closed for a holiday.

The drone strikes have added to the trade war-related uncertainties and deteriorated market conditions globally, said Gaurav Dua, head of capital market strategy and investments at Sharekhan by BNP Paribas. Indian stocks were also impacted by the surge in crude prices, with equity investors ignoring the initiatives announced by the government on Saturday to support the housing sector and boost exports. Analysts said the heightened tension in West Asia will have an adverse impact on inflation. “Any sustained increase in oil prices is always going to be a cause of concern for India, considering we import more than 80% of our oil requirements,” CARE Ratings said in a note on Monday. India imported 4.5 million barrels a day (April-July) of crude, while its import dependence based on consumption has risen to 84.9%, it said.

Crude prices rising by a dollar would increase India’s import bill by roughly $1.6 billion a year, according to CARE Ratings estimates.

“We can maybe foresee an increase in petrol and diesel (prices) in the coming few days, depending on how the oil markets react to the reduction in supply,” said CARE Ratings.

Businesses in sectors such as aviation and paints are likely to be hurt the most due to the rise in crude prices.

Analysts said the spike in prices, even though temporary, will be negative for refiners and distributors of oil and gas. “We do not rule out a possibility of moderation in marketing margins on auto fuels—a $10/bbl rise in global crude and product prices may require OMCs (oil marketing companies) to increase retail price of diesel and gasoline (petrol) by ₹5-6/litre in the following fortnight. Sharp jump in global crude prices may also put pressure on refining margins amid slowing demand, besides increasing absolute quantum of fuel and loss,” Kotak Institutional Equities said in a note on Monday.

Government bond prices also slipped on Monday due to the surge in global crude prices.

The yield on the 10-year Indian government bond rose nine basis points to 6.707% compared with the previous close of 6.637%.

Bond yields and prices move in opposite directions.

Sunil Sharma, chief investment officer at Sanctum Wealth Management, said the spike in crude prices could impact yields in the short term, adding to the fiscal pressures on the government. “Should the situation remain unresolved for an extended length of time, the impact to the global economy could be tangible,” he added.