Oil Price Drop Likely To Help India Strengthen Economy

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Team Industry Outlook | Tuesday, 10 March 2020

The crude oil price crash has sent shocking waves across the world impacting the global economy that is already facing a severe slowdown due to the coronavirus outbreak. The price war initiated by Saudi Arabia against its one-time ally Russia following its refusal to cut the oil production has resulted in this volatile situation.

“Something like this could have more global repercussions than a trade war between China and the U.S. because oil touches so many things in the world economy,” said Rohitesh Dhawan, director of energy, climate and resources at Eurasia Group in London.

Indian Stock Markets Surging Up
Since India largely depend on imports for the oil requirements, this dramatic move from Saudi Arabia to cut down the oil prices will have a positive impact on the Indian economy. And it is quite evident from the constant upsurge of the stock markets since the recent oil price crash. Interestingly stocks in the Indian market have always been inversely proportional to the crude oil prices. This falling oil prices could help the government control the fiscal budget and thereby strengthen the rupee.

India spent USD 87 billion on oil imports during 2018-19, and if the crude oil prices remain low as expected, India could minimize its spending on the oil imports. If oil prices remain around the $30/barrel mark as per the suggestions of analysts, India can manage to reduce the spending to half. "Sustained lower crude oil prices in the near term to benefit India meaningfully given a reduction in current account deficit and enhancement of the fiscal headroom due to lower cooking fuel subsidies and plausible hike in excise duties on auto fuels," Kotak Securities analyst Tarun Lakhotia said. Companies that use crude derivatives are likely to benefit much from this price drop.

However, some analysts believe that falling crude prices are just one of the many other factors contributing to the positive performance in the share markets. The crude prices fall may have a short-term positive impact but a sustainable recovery is not guaranteed.