Crude oil prices back at $100: Can it hit the Indian economy, corporate earnings, and delay stock market recovery?

Crude oil prices are back at the $100 per barrel level, raising concerns that it will derail the Indian economy's growth momentum, curtail the profitability of Indian corporates, and delay stock market recovery.

Brent crude futures have surged over 35% this month, reclaiming the $102 per barrel mark, driven by the intensifying hostilities between the US and Iran. Oil prices may rise even further if tensions in the Middle East do not ease and disruptions to energy supplies expand to regions beyond the Strait of Hormuz and the Red Sea.

Brent futures hit a 52-week high of $126.41 on 30 April this year and eased to $70.14 on 2 July as the US and Iran tried to resolve their conflict through talks. However, several rounds of indirect talks failed to deliver desired outcomes, leading to the collapse of a ceasefire announced earlier.

Higher oil prices can deal a severe blow to the Indian economy as the country is the world's third-largest importer of crude oil and meets roughly about 85-90% of its total oil requirements through imports.

It has a ripple effect on the domestic economy- it can inflate the import bill, widen its current account deficit (CAD), derail its fiscal deficit targets, pressurise the currency, weigh on overall economic growth, and accelerate foreign capital outflows.

According to brokerage firm Motilal Oswal Financial Services, a $10-per-barrel increase in crude could cause a 30–40 basis-point decline in India's GDP growth.

Higher fuel prices also increase inflationary pressures, which can force the central bank to raise rates or at least keep them elevated.

Higher crude oil prices and the resulting increase in domestic petrol and diesel prices may increase the manufacturing, transportation, and other operational costs of companies, which can erode their profitability.

Dhiraj Relli, MD and CEO of HDFC Securities, underscored that a sustained market rally needs earnings growth to justify valuations, broad participation across sectors, steady liquidity from institutions, a benign macro backdrop, such as stable inflation, interest rates, currency, and crude oil prices, and low geopolitical risks.

At the current juncture, the market does not have any comfort on these fronts.

"India’s crude import dependence has nearly halved from 9% of GDP in 2013 to about 4.8% now, despite India still importing close to 90% of its oil. However, that resilience holds if the spike proves temporary, but the earnings-led bullish case - built on oil normalising alongside rate cuts and broadening consumption-led earnings - gets tested if Brent holds in the mid-$90s through Q2 or Q3," said Relli.

Relli believes any de-escalation in the Iran-US conflict, and a corresponding easing in crude oil prices, could plausibly stabilise the rupee, thereby containing imported inflation and supporting the growth outlook, which may prompt a reversal of FII selling.

"The elevated crude prices have had an impact on India's manufacturing economy. Going forward, the continued impact of high energy prices would affect growth and could delay the earnings recovery. It could also impact macro-financial stability through the rupee and domestic liquidity, though the FCNR(B) inflows should offset the damage," said Seshadri Sen, the head of research and strategist at Emkay Global Financial Services.

The situation is concerning, as persistently high crude oil prices could adversely affect all the key macroeconomic indicators, weigh on corporate profitability and put further pressure on earnings growth.

Shrikant Chouhan, the head of equity research at Kotak Securities, believes if crude sustains at elevated levels, inflation could rise to the 5%–5.3% range, while India's real GDP growth may slow to around 6.25%. The current account deficit (CAD) could widen to nearly 2.5%, and the rupee may weaken toward 97 against the US dollar, or remain in the 93–97 range.