Lower oil prices benefit India
The Indian stock market has been one of the biggest beneficiaries of falling international crude oil prices.(THE OIL EFFECT) Since the middle of July, when crude started falling from its highs, the Bombay Stock Exchange’s Sensex has outperformed other markets very handsomely.As the chart shows, the Sensex has gone up 22.3% between 15 July and 11 August (taking the closing figures). No market in Asia even comes close to that kind of a gain. Nor have we outperformed merely the Asian markets—over the period 15 July to last Friday (8 August), the Footsie was up 7.2% and the Dow Jones Industrial Average 6.3%. Markets in commodity producers such as Brazil, which were the stars in earlier months, fell during the interval.That’s not all. As the US dollar strengthened during this period, all Asian currencies, including the Chinese yuan, depreciated against the dollar except for the Indian rupee.For the dollar investor, therefore, the gains have been even higher in the Indian stock markets, with BSE’s Dollex 30 index rising by 25.85% between 15 July and 11 August.In a note to clients, analysts at JPMorgan Chase and Co. said: “The low yielding currencies from open economies most leveraged to global growth are taking the brunt of the impact, while less cyclical FX that also benefit from the oil price decline are being impacted the least.”It’s very probable that Indian stocks too have outperformed for the same reason: the Indian economy is more exposed to an oil price hike and hence it benefits disproportionately from a decline. Also, it is relatively more insular and hence less exposed to international trade and slowing growth elsewhere.But curiously enough, Chinese investors are not celebrating, despite the Olympics and in spite of the Chinese economy being a prodigious consumer of crude. The Shanghai Composite index closed at 2,470 on Monday, a level last seen in December 2006.The latest reason for the poor showing is China’s higher-than-expected producer price index reading for July, which is up 10% year-on-year, compared with a rise of 8.8% in the previous month.There is a slew of data that point towards a slowdown, such as the July’s reading of the Purchase Manufacturers’ Index, the lowest in the last three years and a fall in electricity production.The rise in wholesale prices, combined with flat, or lower consumer prices (partly because of price controls), is not good for corporate profits, as firms are unable to pass on the rise in input prices. The concerns about the Chinese economy are difficult to explain, particularly as Chinese Premier Hu Jintao, at a speech on 1 August, had said, “Growth is China’s priority concern and inflation is China’s major concern”, which was interpreted to mean that henceforth China would emphasize growth to controlling inflation.China has the wherewithal to easily increase spending on infrastructure, given its low fiscal deficit.
