High crude oil prices for India, a net oil importer, seem to wreak havoc on its macro-economy. Although India’s direct links to Russia and Ukraine in terms of trade are not large, as had been predicted, oil has taken a beating as the conflict is driving up the prices of the vital commodity.
with Brent Continuing to hover above the $120 a barrel mark, it is feared that India will bear the brunt in the form of rise in retail inflation and widening current account deficit. Not only this, the pressure on imports is likely to increase further with the Indian rupee moving to a new low.
Needless to say, these factors are troubling investors.
It is no surprise that foreign research institute Credit Suisse has downgraded India from overweight to underweight rating. “Higher oil prices hurt the current account, exacerbate inflationary pressures and increase sensitivity to Fed rate hikes,” it said in a report.
With India in pain, better-positioned emerging market peers are likely to benefit. “We use free money from India to overweight China from market weight,” the Credit Suisse report said. According to the Foreign Research House, although China’s credit intensity still bleaks long-term prospects, its low oil import bill, insulation from Fed rate hikes and improving macro indicators are some of the positives they like.
Emerging Markets Equity Funds tracked by EPFR made 11th consecutive inflow during the week ended March 2 as investors maintained confidence with fund groups dedicated to Greater China – China, Taiwan and Hong Kong – Cosmos, fund-flow tracker EPFR Global Said in his weekly report on March 4
On the other hand, BRIC (Brazil, Russia, India and China) equity funds saw their second straight week of huge redemptions, posting their biggest outflows since mid 4Q20, added the EPFR report.
Indian companies that are heavily dependent on raw material base are now exposed to greater risk of gross margin compression. Even if they raise prices to protect margins, weaker demand means less volume growth. Despite the downside risk, Indian stocks are not cheap. This could also be one of the reasons why investors are leaving Indian equities for cheaper options.
Jefferies India Pvt. Ltd said in a report on March 8.
The report said, on a relative relative basis, the Indian market continues to trade at a premium of around 15% versus historical despite the recent underperformance against ASEAN (Association of Southeast Asian Nations) etc.
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