While falling crude oil prices — especially drastic and sharp — is a boon for the Indian economy, a decline beyond a particular level is not taken positively by investors as it ignites fears of recession. Similarly, a spike has also triggered selling pressure on the bourses.
Brent crude recently hit a 12-year low of $27.67 a barrel on supply glut and poor demand. Average Brent crude prices have fallen 24 per cent so far in 2016 and FIIs are net sellers in Indian equity markets to the tune of $1.2 billion. As a result, S&P BSE Sensex is down 8 per cent in 2016 so far.
It was the same in 2015. FIIs inflows declined over 80 per cent in 2015 compared with 2014 as the average crude price was 46 per cent lower than in the previous year.
Again in 2011, when crude prices went above $100 a barrel, FIIs were net sellers to the tune of $357.8 million.
While decreasing crude prices trigger global worries, a dramatic increase too make FIIs nervous about the Indian economy since India is a net importer of crude.
In July 2008, Brent crude hit an all-time high of $145.61 as the global financial crisis swamped all markets and the dollar began depreciating. At that time too, FIIs turned net sellers to the tune of about $12 billion.
Many market participants said fall in crude oil prices is forcing sovereign wealth funds of oil producing countries to offload their holdings in order to keep their balance sheets in good shape. According to JP Morgan estimates, oil producing countries will sell $240 billion of international assets in 2016, mostly stocks and bonds, to help cover a current account deficit of $260 billion.
“The lower the oil price, the higher the potential depletion of sovereign wealth fund assets as oil producing countries struggle to prevent their spending from declining too much,” the foreign bank said.
Year 2009, however, was an exception when huge FII inflows were strong despite crude prices falling 35 per cent from 2008 levels. This is because things started recovering in 2009 post the financial crisis. FIIs pumped in $17.5 billion during 2009 after withdrawing $12 billion in 2008.
“In 2015, the FII selling was not only due to crude’s fall but also due to fears of rate hikes by the US Fed,” said Pankaj Pandey, Head — Research, at ICICI Securities. He is hopeful that FIIs will return. “There is a speculation that the US Fed will not hike rates given the global rout,” he said.
G Chokkalingam, founder, Equinomics Research and Advisory, agrees. “The 2009 kind of scenario is very much possible by the fag end of 2016 as fundamentally crude prices are almost at the bottom. Every 50 cent fall in oil from current levels is going to be tough,” he said.
Fluctuation in crude oil prices also impacts the domestic economic activity, say analysts.
UR Bhat, MD, Daltal Capital Advisors, said: “When the crude oil prices spike, India’s import bill goes up dramatically, while there is no commensurate increase in our exports. However, when crude oil prices collapse, they put a question mark on the global demand scenario, which is important for our exports.”