India's broader market more vulnerable than ever to a spike in crude prices

India’s broader market is more vulnerable to a spike in crude oil prices than any point in nearly decade thanks to a dwindling weighting of export driven companies in the benchmark Nifty 50 index.

Companies with large exports revenues, such as Tata Consultancy Services, Infosys, Sun Pharma, Cipla, UPL, Tata Motors, and Bajaj Auto, accounted for only 16.5 per cent of the NSE Nifty 50 index — the lowest in a decade at the end of December 2019.

In comparison, companies in sectors, such as information technology services, pharmaceuticals, agro chemicals, and automotive exporters, accounted for 17.3 per cent of the Nifty companies’ combined free float at the end of December 2018 and as much as 26.1 per cent at the end of December 2015.

Index movement and the weighting are calculated on free-float market capitalisation of individual index stocks. Free float is the portion of the shares owned by non-promoters.

This the analysts say make the index and the broader market vulnerable a spike in energy prices and the resulting depreciation in rupee against the US dollar. “Thanks to their dollar revenues, exporters are less vulnerable in a market sell-off triggered by higher crude oil prices compared to domestic market focused companies. A weaker currency boosts their revenues in rupee terms and make them more competitive in overseas markets,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

A weaker rupee raises the cost of imports — either directly or indirectly — for domestic market focused manufacturing companies that puts a pressure on their operating margins and profits.

Lenders on the other hand lose by way of higher borrowings, which typically follows a currency depreciation. The Bank Nifty — the index of the country’s top banks — was one of the biggest losers on the bourses on Monday as bond yield spiked post the depreciation in rupee against major currencies. Bank Nifty was down 2.6 per cent against 1.9 per cent fall in the broader Nifty50 index.

In comparison, Nifty IT index ended in the green while Pharma index declined but less than the boarder market.

Historically, there has been ad adverse relationship between international prices of crude and the movement of the broader market due to India's large import dependence. Imported crude oil accounts for nearly 80 per cent of India’s energy demand and imports exceeds export revenues for most of the large manufacturing and energy intensive industries.

For example, the market fall in the first half of 2019 was preceded by nearly 50 per cent rise in crude oil prices between December 2018 and May 2019. Conversely the post-September rally was preceded by 22 per cent fall in crude prices over the preceding three months. Similarly, the sharp sell-off in 2013 during the taper tantrums was preceded by a rise in crude oil prices during the second quarter of 2013 calendar year.

Some economists, however, say that slower industrial and consumer demand has lowered the vulnerability of Indian economy to higher crude oil prices. "At the macro level, Indian economy is less vulnerable to higher energy prices than in the past. Our crude oil import has declined in recent months due to depressed economic activity. Diesel and petrol sales are also showing contraction due to lower cargo movement and poor auto sales. This is likely to cushion the blow from higher crude oil prices," said Madan Sabnavis, head economist, CARE Ratings.

Things could, however, get ugly if crude oil prices stay above $75 a barrel of few months triggering a sharp fall in the rupee and a spike in bond yields, he warned.