It was a Terrible Tuesday for the markets. In an increasingly inter-connected financial world no country can escape without catching a global flu. The carnage witnessed in India’s equity markets on Tuesday is a manifestation of this syndrome. The 30-share BSE Sensex fell more than 850 points primarily on falling crude oil prices, which investors see as symptomatic of a wobbly world economy. Between 2010 and 2014, global oil prices have stayed above the $100/barrel level, primarily because of high demand and geopolitical tensions in Iraq and Libya. The tide has since turned, with the trend becoming more discernible since June. In the last seven months, crude oil prices have plummeted from about $115/barrel to less than $50 at present.
For India, which imports nearly 80% of its crude oil requirements, the sharp drop in global oil prices could usher in some good news. If nothing else, it will cut down the country’s import bill and enable oil-marketing companies to reduce retail prices of fuel. Lower oil prices will also aid the government’s efforts to keep inflation low and stable, besides curtailing fuel subsidies. A lower subsidy bill will help contain the country’s fiscal deficit at the budgeted level of 4.1% of GDP in 2014-15.
There is a caveat, though. The oil price fall is a symptom of a deeper problem. There are looming concerns that Greece might exit the European Union (EU). The EU is considering a fresh stimulus package; Russia is battling a geo-economic crisis, Japan looks far away from clawing out of its decadal recession and there are signs of deceleration in China. The economic worries in Europe, a major export market for India, could hurt shipment orders. Besides, a persistent rise in the dollar against the Euro could eventually hurt the rupee. Also, continued uncertainty over the EU’s economic prospects could prompt foreign portfolio investors to move funds out of emerging markets to safer locations closer home such as the United States. This could hurt India’s equity markets, and the consequent dollar outgo could also result in the rupee’s slide. Ultimately, it will boil down to how effectively the economy is able to strike a balance between choppy financial markets and a slow-moving real sector. This might call for some deft policymaking.