Crude oil spikes to $84/bbl; Know how high crude prices affect Indian market, economy

Crude oil prices extended gains for the third session on March 2 amid hopes of strong demand from China. Worries over high US crude oil inventories were offset by the signs of a strong economic rebound in the world’s largest crude oil importer China after data showed that the manufacturing activity in the country rose to the highest in a decade.

While economic signs from China supported the crude oil price, the tenth consecutive week of increase in crude inventories in the US capped the gains. Brent crude futures traded around 0.1% higher at $84.43 a barrel, while US West Texas Intermediate (WTI) crude futures traded at $77.76 per barrel.

Crude oil prices have a significant impact on the Indian markets as well as the economy. Central banks, financial institutions and investors globally keep a close track of crude oil prices given its significance. Here is how crude oil prices affect the Indian markets and economy:

Rise in inflation

India’s dependency on imported crude oil was 87% in the April-January period. Crude oil is an essential commodity for manufacturing, transportation, trade and logistics. An increase in the price of crude oil has a trickle-down effect which makes everything else more expensive and gives rise to inflation. High crude oil prices can lead to higher production costs and higher transportation costs which also increase the overall cost of living.

An increase in crude oil prices can lead to an increase in the Wholesale price index (WPI) as well as the Consumer price index (CPI). This in turn can lead central banks to raise interest rates.

Weakens the rupee

Crude oil prices are a large factor in the value of the Indian currency. Since India is the world’s third-largest importer of crude oil, rising prices lead to higher government import bills. A huge import bill leads to a rise in the current account deficit of the government. This means the government has to sell rupees and buy dollars to pay its bills, which ultimately depreciates the value of the Indian currency.

Impact on Indian market

Lower crude oil prices are extremely helpful for the Indian economy as it imports more than 80% of its crude oil. A decline in prices directly translates to lower foreign currency expenditure.

The end-user industries like oil marketing companies, paint, FMCG, tyre, specialty chemical and lubricant players, among others, heavily rely on crude oil as raw material. Hence, fluctuations in crude oil prices have a significant impact on the corporate earnings of such companies.

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