Rising oil is something nobody has factored into their investment calculus. So, there will be a need to rewrite the whole math. When the market is forced to suddenly revisit its math, it is more likely that the rework will be aggressive. So, the market reaction will tend to be kneejerk. For sure, there will be a sense of urgency.
The sharp bounce we saw in technology stocks at the prospect of a weakening rupee is a recent instance of this behaviour. Now, we are staring at costly oil. This should mean a weaker rupee, tighter forex reserves and higher inflation. India has one more decade of enduring the pain of oil. By then alternate energy will clearly grow and electric technologies will de-risk our economy significantly from oil. But, the intervening years will see the pain come and go.
Should we read too much into the oil price trend? Will it impact our macros severely? The government has a number of options before it. It certainly has to take decisions that will help soften the double blow from the spike in exchange rate and oil price. When it does, there will be other consequences. Striking the right balance is critical.
In the past, governments failed miserably at this. While oil is a risk, it is also likely to help the much-awaited earnings recovery for the index. We remain a commodity heavy index and there is definite scope for earnings of biggies to grow. But, that is contingent on the quality of governance. Populism will clearly spoil the party. One thing is certain. Those companies that saw earnings expansion purely due to cheap oil are going to see their party end abruptly. The stock market seems ill-prepared for that event.
