Why falling crude oil price is good news for India

After witnessing a continuous rise in their prices for a while, crude oil prices fell internationally overnight. It is currently trading at its lowest level in the last two months and is almost USD 10 down from its recent peak. One of the reasons for such fall is due to Saudi Arabia, world’s biggest oil exporter, reiterated its plan to lift oil output.

Falling crude oil prices is always good news for India. This is because India is the net importer of crude oil and fulfils little more than two third of its all requirement through import.  As the crude oil prices increase it exerts pressure on the entire economy and especially government finances. According to a rough estimate, every USD 10 per barrel fall in crude oil price helps reduce retail inflation by 0.2% and wholesale price inflation by 0.5%. One more beneficiary of the falling oil is Indian rupee. As crude oil prices fall, Indian rupee gains. The Indian rupee strengthened to a three-week high on October 24, 2018. Falling oil, strengthening rupee has aided the gain in equity indices.  Even the benchmark 10-year bond yield was down 4 basis points at 7.85 %. This will improve the performance of the banks as fall in the bond yield will improve their treasury profits. Since financials hold more than 30% weight in the index, it is going to improve the overall performance of the indices.

The graph below clearly shows there is an inverse relationship between crude oil price and INR and crude oil prices and equity indices.