In past few days many market experts have highlighted that the
recent fall in crude prices is a major positive for Indian economy. Through my
interactions with some investors I learned that many investors do take the
publically expressed random opinions of these experts quite seriously and
actually base their decisions on these.
Besides, small investors are also usually seen following the
actions large celebrity investors. Even in recent past, there have been many
instances where small investors have emulated the actions of large investor
buying a meaningful stake in a stressed asset.
From the regulatory standpoint there is no violation in both
these cases. The market experts are free to publically express their opinions
and views about the market trends and events. The companies, stock exchanges
and investors are in fact obligated to make public disclosure of large
secondary market deals. But there could be an ethical lacuna in these practices.
For example, one reputed fund manager, who presently runs an
investment management and advisory firm and had been CIO of one of the top AMCs
in the country, recently tweeted "$40 for crude in 2020 coming soon. Big
positive for India!"
Obviously he made this assertion in zest and may not have any
particular design in mind while writing this tweet at midnight. However, his
numerous followers may find it an "advice" and accordingly act upon
it.
It would therefore be better if the "experts" had also
highlight that crude prices usually have positive correlation with India's GDP
growth. In past 20yrs, all three episodes of sharp rise in crude prices have
resulted in rising trend in India's GDP growth rate, and vice versa.
- 2004-2007: Brent Crude prices jumped from under $30/bbl to over $140/bbl. In this period India's GDP growth accelerated from about 3% (FY03) to 9.5% (FY08).
- 2010-2012: Brent crude prices again jumped from $40/bbl to $$120/bbl. In this period, India's GDP growth improved from 5.5% in FY13 to 8.25% in FY12.
- 2016-2017: Brent crude prices jumped from below $30/bbl to over $80/bbl. In this period also India's GDP growth improved from 7.5% in FY15 to 7.75% in FY17.It would be pertinent to note that crude prices fall in response to demand slowdown. A fall in crude prices has not particularly shown to be pushing the growth higher. Besides, the Indian markets have not shown any significant correlation with the rude prices in the past.Lower crude prices hurt many businesses like oil & gas producers and oil marketing companies.Lower crude prices hurt state revenues (excise and customs) which are ad valorem to crude prices. Since the fuel pricing is not market driven and subsidies have been virtually eliminated, the offsetting positive impact on fiscal in form of lower subsidies is no longer available.Moreover, if the crude prices are falling due to demand slowdown, the benefit to the consumer industries is limited as they are not able to increase production at lower cost. So lower crude prices may help in protecting margins to some extent during the demand slowdown period, but may not necessarily result in higher profits.It may be noted that sharp fall in crude prices in 2008-09 and 2014-16 did not result in any major gains for Indian stock markets.
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