Russia-Ukraine war: Here's how rising oil prices will impact India Inc., economy

Rising crude oil prices are considered a major challenge for India Inc. because any hike in raw material and energy prices may put further pressure on the margins of domestic companies going ahead. The price of Brent crude oil crossed $100 per barrel-mark on Thursday as Russian President Vladimir Putin declared war against Ukraine.

According to market watchers, higher crude oil prices are major headwinds for a couple of sectors including aviation, paint, tyres and oil marketing companies. Brent crude oil has jumped over 30 per cent to $101.40 on a year-to-date basis till February 24. The commodity was at $77.78 per barrel on December 31, 2021.

Following the rise in crude oil prices, the cost of aviation turbine fuel (ATF) has advanced 19 per cent to Rs 90,519 per kl from Rs 76,062 per kl on January 1. The rise in ATF prices may hit the balance sheet of airline companies which accounts for more than 35 per cent of the cost of running an airline in India.

Shares of InterGlobe Aviation, the parent company of IndiGo airlines, traded over 7 per cent down at Rs 1,894 in the morning trade on February 24, while the benchmark BSE Sensex traded 2.91 per cent lower at 55,566 at around 11.05 am (IST). On the other hand, SpiceJet was down 4.12 per cent at Rs 58.20.

On the other hand, paint companies use crude oil derivatives such as monomers and titanium dioxide as raw materials, which account for more than 50 per cent of a company’s total expense. Likewise, crude derivatives are also used in the manufacturing of tyres which constitutes around 30 per cent of the total raw material cost.

Paint major Asian Paints traded over 2 per cent down at Rs 3,167 in the morning trade on Thursday. Berger Paints and Kansai Nerolac were also down over 3 per cent each. Tyre companies like MRF, JK Tyre and Ceat were also down over 2 per cent each.

Commenting on soaring crude oil prices and their impact on India Inc., Santosh Meena, head of research, Swastika Investmart said, “High inflation is a key concern amid strong growth where we are seeing sharp margin pressure in earnings of India Inc. If crude oil prices remain elevated, then it may hurt the sentiment in the near term.”

“Strengthening crude oil prices may impact sectors like aviation, paint, tyre, and oil marketing companies while oil exploration companies may get the benefit. Higher oil prices will put pressure on the currency which is a positive for export-oriented sectors like IT and pharmaceuticals,” Meena added.

VK Vijayakumar, chief investment strategist, Geojit Financial Services added that if crude prices remain at high levels it can be a major macro headwind for the Indian economy.

“Our trade deficit will widen; the rupee will depreciate and inflation will rise. Even if the government absorbs part of the crude spike through excise cuts, part of the hike will have to be passed on to consumers resulting in cost-push inflation. The RBI will be forced to withdraw from the accommodative monetary stance that they have been following since the outbreak of the pandemic. But if the crisis blows over soon, crude will come down the situation will stabilise.”

Megh Mody, research analyst-commodity and currency, Prabhudas Lilladher said, “Brent will continue to soar as geopolitical tensions escalate and war which is now imminent. If Brent continues to surpass $105-110 then India will suffer as inflation will touch sky high along with other countries in the world. The Indian rupee will be weaker going ahead. The crude imports, which stand at 20 per cent of India’s import bill, need to be dropped to a certain per cent and substitutes of crude for example ethanol needs to be introduced as early as possible to free the country from the clutches of inflation.”

“As war will pick up, the probability for money printing is likely which will again favour the global equities, which was seen in case of a pandemic,” Mody said, adding historically, crude oil and Nifty has been in a positive correlation.