Oil prices crash most since 1991, but sliding Rupee keeps petrol diesel rates up

Tracking the global route, Indian benchmark indices witnessed their biggest fall in terms of points. While Sensex tanked over 1,941 points to end at 35,634 and Nifty was down 538 points to close at 10,451.45, as coronavirus fears, crude oil price slump and issues involved in Yes Bank's restructuring plan weighed on investor sentiments.

In percentage terms, the collapse was over 5% in both the indices. As much as Rs 6.2 lakh crore of the investor wealth was wiped off during the day. Stock wise, oil and banks were the biggest losers. Mukesh Ambani's Reliance Industries and ONGC lost over 14% on fears over refining margins getting hit. Banks were hit to a 13-month low due to problems in Yes Bank sparking broader concerns.

Brent crude continued its declining trend, witnessing its biggest drop to $31.02 a barrel, since the gulf war of 1991 on weak Chinese demand and a steep cut in oil prices by Saudi Arabia, but a weak rupee may spoil India’s chance to benefit from the lowering crude prices.

Brent crude futures were down 31.5%, to hit a low of $31.02 a barrel, the biggest percentage since January 17, 1991 but the rupee too has lost 2.5% past week and continued to trade downward at 73.98 on Monday early hours, touching 74 at one point.

A weaker rupee makes it more expensive to import oil, however if the decline in global oil prices stay steeper for a long time, it could offset the impact of the weak rupee to some extent, oil traders said. Oil could then become cheaper for India even if the rupee stays lower.

While the oil prices have been falling on the fears of demand slump in the world’s major economies, the latest trigger has emerged from the Saudi Arabia cutting its official selling price for April by upto $8 per barrel for all destinations, and, Russia disagreeing to OPEC’s proposal for an additional production cut of 1.5 million barrel per day. Goldman Sachs has warned prices could drop to near $20 a barrel.

“Saudi Arabia and Russia are entering into an oil price war that is likely to be limited and tactical,” political risk consultancy firm Eurasia Group said in a statement. Russia is the world’s second-largest producer of crude oil, while Saudi Arabia is the world’s largest exporter.

While, a dollar per barrel drop in crude prices reduces India’s import bill by over Rs 10,000 crore per year, the depreciating rupee has neutralized the gains so far.

Rupee is precariously close to an all time low of 74.45 per dollar, weighed down by concerns of coronavirus weakening global economies and the moratorium on YES Bank by Reserve Bank of India. There is also an uncertainty over whether the RBI would effect a rate cut to help India fight the virus outbreak.

India, a net importer of oil, stands to lose as long as the rupee keeps depreciating. India imports more than 80% of its domestic oil requirement. India’s oil impot bill was close to $112 billion in 2019. The cost of India’s crude basket hovered above $51 per barrel, is expected to come down further after the steep cut in crude prices. Indian basket comprises the average of Oman, Dubai and Brent crude.

A slump in oil prices impacted the financial markets across the globe and impacted currencies of developed and emerging economies, with investors once again finding solace in haven assets. As a consequence, gold prices hit a seven-year in international market but in India, they moved downward from a record of Rs 45,000 per 10 gram last week.