Boiling oil may cost billions to investors, India Inc, households & govt: Here’s the math
NEW DELHI: A surge in oil prices to $139 a barrel levels triggered a panic selling on Dalal Street on Monday as investors fear a surge in inflation, followed by a sharp reversal in the RBI policy stance. Here is how a rising oil price could hurt corporates, investors, households and government in the coming months:
Corporates: $23 billion
Kotak Institutional Equities estimated the Indian economy to incur an additional $70 billion burden at an average crude price of $120 per barrel and sees meaningful upside risks to inflation and downside risks to corporate profits through increased pressure on margins and volumes both.
It estimated an incremental $8 billion cost of industrial fuels, $11 billion of freight cost and $4 billion cost of other products from higher crude prices. While the brokerage expects companies to transfer the bulk of the raw material increase to households eventually through higher product prices, it sees lower gross margins and volumes both in FY23 as it may not be easy to fully raise product prices immediately.
Households: $50 billion
The brokerage expects households to bear the bulk of the burden of higher gasoline, diesel and LPG prices assuming oil companies do not bear any share and the government bears some share on auto fuels.
“We estimate the direct impact at $22 billion. In addition, they will also bear the indirect impact of higher fuel and freight costs as and when companies pass them on to consumers. The impact will get diffused across 350 million households but the burden will fall disproportionately on lower- and middle-income households,” Kotak said.
Overall, the brokerage sees $50 billion incremental impact on households from $120 a barrel crude in FY2023.
Government: $20 billion
Kotak said the government may have to cut excise duty on diesel and gasoline further to mitigate the impact on consumers. It assumes that the government may not bear any LPG subsidy.
“Excise revenues may decline by $20 billion assuming a Rs 10 per liter cut in excise duty on diesel and gasoline. Also, the government may need to increase MSPs of various crops sharply given the steep increase in input costs and procurement to support farm incomes. We would not rule out a 10-12 per cent increase in MSPs in FY2023 versus the average 3-4 per cent increase seen in the past few years. However, FY2023 procurement of wheat prices will be at 2022-23 prices. As such, the food subsidy of the government may increase by $3.5 billion,” Kotak said.
Investors: $200 billion & counting
The recent surge in crude prices had wiped out $200 billion value of the domestic stock market from the recent highs. A rise in crude oil prices would dent corporate earnings and thus, earnings per share (EPS), for most companies. Demand would also slow down for corporations, hitting the top line. It will lead to further earnings downgrades and loss of investor faith in equities.
Morgan Stanley recently estimated expansion of the current account deficit by 75 basis and inflation by 100 bps on an annualised basis due to the recent rise in oil prices. This could keep the rupee weak, which hit 76.8 level today. A weak rupee lowers the attractiveness of domestic stocks for foreign investors. Data showed foreign equity outflows have hit Rs 83,616 crore level in 2022 so far.
While Brent crude prices are uncorrelated with headline inflation in India because fuel & light have only a 6.84 per cent weightage in the CPI, but a generalised surge in commodity prices will likely keep India’s CPI inflation above 6 per cent YoY in March-April nudging the RBI to raise the repo rate by 50 bps in April-July, said ICICI Securities.
Investors will see swings on both sides and very aggressive swings over the next few days as news flow changes every day, said Sandip Sabharwal.
“I think short term and medium term investors should stay out of the market because volatility is going to be very high. For people who have cash, they will still get better levels because most people are starting to recognise risk, lot of redemptions have started and I think once they start, they last a few weeks. Then, ETF selling comes in that tends to be indiscriminate .They are not bothered about market valuation,” Sabharwal said.