Sandeep Nayak, the CEO of Centrum Broking Ltd, has written a piece for the Economic Times noting that India, which is the fourth largest consumer of oil, is a big beneficiary of falling oil prices which lowers import bills and saves foreign exchange. In fact, a $10 fall in crude could reduce India’s current account deficit by approximately 0.5% of GDP and the fiscal deficit by around 0.1% of GDP while inflation expectations are reined in and this could help the much awaited rate cut cycle which most market participants expect as a likely event by the second quarter of this year.
However, low oil prices will also have marginal negative effects as India’s exports to oil producing economies could be impacted. Moreover, a large part of the Indian diaspora is working in oil producing countries – meaning remittances could be impacted. Hence, its critical that oil recovers to a level (say around $70 according to author) at which it is balanced in favor of India’s imports without affecting its exports too much.
Indian sectors that will benefit from falling oil prices directly as well as indirectly include automobiles, plastic industries (including pipes), chemicals and resins (selectively), paints and footwear manufacturers with the benefit not yet fully priced in stocks like Tata Motors Limited (NYSE: TTM), Bata India Ltd (BOM: 500043), Relaxo Footwears Limited (BOM: 530517), etc.
On the other hand, upstream oil and gas companies along with companies that provide services to the oil and gas sector will feel a mixed effect. On the positive side, a lower oil price means a lower subsidy burden and a drop in net realisation is cushioned by a drop in the subsidy. Realisation would get impacted for private sector oil companies as well.
Nayak ended his article by saying:
“…the silver lining for India is that when the dust settles down, the capital earmarked for emerging markets and BRICs economies, is likely to flow into India given its relative attraction compared to a weakening Brazil on falling iron-ore prices or a collapsing Russia reeling under this oil price fall. China appears to be competition but India with a newly elected democratic, progressive government should steal the show in 2015.”
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