Experts warn sustained oil rally could weigh on stock markets, rupee; renewables, EVs may gain

A sustained rally in oil prices is likely to weigh on Indian equities and the rupee, creating sharp sectoral divergences. However, it could benefit businesses linked to renewable energy and electric vehicles, according to market experts.

Brent crude surpassed the $100-per-barrel mark for the first time since May 26 on Friday amid intensifying geopolitical tensions. Iran's Houthi allies announced that they had attacked two Saudi oil tankers in the Red Sea.

Oil prices have surged more than 30 per cent this month as fighting in West Asia sharply escalates. At the time of reporting, Brent crude was trading at around $99.85 per barrel, while crude oil was trading at around $91.27 per barrel. Indian equity indices are already bearing the brunt of rising oil prices, with the Sensex and Nifty falling for the fifth consecutive session.

Nifty Oil & Gas was trading at around 11,078.65, down 49.85 points or 0.45 per cent. The indice fell 1.95 per cent at the time of reporting.

Commenting on the implications of Brent crude surpassing the $100 per barrel on India, Manoranjan Sharma, Chief Economist, Infomerics Valuation and Rating Limited noted, "A sustained rise in Brent crude above $100/ barrel would significantly dampen Indian equities, the rupee and macroeconomic stability, while creating sharp sectoral divergences.

For equities, higher crude would increase India's import bill, widen the trade and current account deficits and revive inflationary concerns, Sharma noted. "This would compress valuations, increase volatility and, with elevated market valuations, make foreign investors more cautious. India's eroded acro-stability premium could also delay earnings-led rerating," he said.

According to Sharma, the impact would be sectorally skewed. He noted, upstream oil and gas producers, select energy-service companies and businesses linked to renewables and electric vehicles could benefit.

Conversely, oil marketing companies, aviation, paints, chemicals, automobiles, logistics and other fuel- or petrochemical-intensive industries could face margin pressure, unless higher costs are transmitted.

Sharma warned, "Prolonged prices above $100 would intensify dollar outflows and exert downward pressure on the rupee. The RBI may need to balance foreign-exchange intervention with a tighter monetary stance to contain imported inflation and preserve external stability."

"For the broader economy, high oil prices function as a "stealth tax" on a net importer, raising transport and input costs, squeezing real incomes and potentially moderating consumption and investment," he said. Likewise, Sourav Choudhary, Managing Director, Raghunath Capital said, "Unless there is a prolonged disruption to oil supplies or a meaningful escalation in geopolitical tensions, Brent crude sustaining well above $100 per barrel appears unlikely."

"Aviation, paints, chemicals, tyres, logistics, cement and other energy-intensive industries are likely to witness margin pressure if elevated oil prices persist. On the other hand, upstream oil exploration and production companies are expected to benefit from higher crude realizations, while select oilfield service providers could also see improved earnings prospects," he said.

Swarnendu Bhushan, Co - Head of Research, PL Capital noted, "Rising oil prices would worsen the already loss making oil marketing companies and they are expected to remain under pressure if oil prices remain strong. Damage to refineries is likely to keep product cracks higher for longer, thereby benefiting the Indian refiners. Independent refiners like MRPL and Chennai Petroleum are likely to continue posting good numbers and refining segment of OMCs are also expected to benefit."