How high crude oil prices are hurting Dalal Street investors

Dalal Street was under renewed pressure on Tuesday, with benchmark indices sliding towards their lowest levels in nearly six months. But this is not just another bout of foreign selling or profit-taking.

Rising crude oil prices are emerging as one of the biggest threats to the market because they can hit several parts of the economy at the same time, from oil marketing companies and the rupee to inflation, corporate margins and India's current account.

Around 10:10 am, the Sensex was down nearly 650 points at around 72,100, while the Nifty was struggling to stay above 22,500. Both indices entered the session at their lowest levels in roughly six months after the Sensex plunged 1,124 points and the Nifty fell 1.56% on Monday.

The sell-off was broad-based. 14 of the 16 major sectoral indices were in the red in early trade on Tuesday, with banking, financial and IT stocks among those under pressure.

Foreign portfolio investors are certainly part of the problem. FPIs sold Indian equities worth Rs 5,353 crore on Monday, their biggest single-day outflow in September, while domestic institutional investors bought Rs 5,189 crore.

But crude oil is increasingly becoming the bigger macroeconomic worry.CRUDE IS BACK ABOVE $100. WHY DOES THAT MATTER?

Brent crude rose to around $107 a barrel on Tuesday as concerns over oil supplies from West Asia intensified. India, being one of the world's largest crude importers, is particularly vulnerable to such a sustained increase.

India's crude oil import dependence stood at 88.7% in FY26, according to government data. That means a sustained rise in global oil prices quickly translates into a higher import bill and greater demand for dollars.

The pressure is already visible in the currency market. The rupee slipped past the Rs 96-per-dollar mark on Tuesday, with Reuters attributing the move partly to the latest jump in oil prices.

There is a simple reason why markets dislike this combination. More expensive crude means India needs to spend more on imports, which can widen the trade deficit and put pressure on the rupee. A weaker rupee, in turn, makes dollar-denominated crude imports even more expensive.

The impact can become particularly painful if oil stays elevated for months rather than days.

An IMF assessment citing RBI estimates has previously found that a sustained $10-per-barrel increase in crude prices can add about 0.4 percentage point of GDP to India's current account deficit.

India's oil exposure is therefore not limited to petrol and diesel prices. It affects the country's external balance, currency and inflation outlook — all of which matter to equity investors.OMCs ARE ALREADY FEELING THE PAIN

This is where the impact is becoming particularly visible.

Retail petrol and diesel prices have not fully adjusted to the rise in crude oil prices. That leaves state-owned oil marketing companies — Indian Oil, BPCL and HPCL — absorbing part of the shock through weaker marketing margins.

According to ICRA, OMCs are currently losing around Rs 8 per litre on petrol and Rs 9 per litre on diesel, while under-recoveries on domestic LPG have risen to around Rs 300 per cylinder. Taken together, the three state-run OMCs are estimated to be facing a financial hit of around Rs 530 crore a day.

The numbers show why investors are worried.

If Brent averages between $105 and $115 a barrel for the rest of FY27 and domestic retail fuel prices remain unchanged, ICRA estimates that OMCs could face around Rs 64,000 crore in under-recoveries on petrol and diesel during the full financial year.

Either consumers eventually face higher fuel prices, which can feed into inflation and weaken consumption, or OMCs continue absorbing the shock, which hurts their earnings and cash flows.

Neither outcome is particularly comforting for equity investors.PROBLEM GOES BEYOND OIL STOCKS

This is perhaps the most important part of the story.

High crude prices do not hurt only oil companies. They can squeeze margins across the economy.

Airlines face higher fuel costs. Paint and chemical companies face higher input costs. Tyres, plastics and packaging companies can also feel the pressure because many of their inputs are linked to crude derivatives. Logistics costs can rise as well.

Companies may try to pass these higher costs on to consumers, but their ability to do so depends on demand. If they cannot fully pass on the increase, profit margins take the hit.

That is why sustained crude prices above $100 can become an earnings problem for India Inc.

And this comes at a time when investors are already worried about global interest rates.

Dr V K Vijayakumar, Chief Investment Strategist at Geojit Investments, said, “With Brent crude above $106 and the US 10-year at 5.23%, the global macro construct continues to be unfavourable for equity markets. The emerging macro scenario in the US appears to be one of high growth and high inflation.”

He also pointed to the pressure on India's fiscal and growth outlook if crude prices remain elevated.

“Therefore, if crude prices remain elevated, the fiscal strain can impact India’s GDP growth and corporate earnings growth for FY27. This concern, too, is weighing on the market,” Vijayakumar said.advertisementWHY FIIs ARE SELLING?It would therefore be wrong to blame the entire market decline on crude oil.

Foreign investors have been selling heavily, while elevated US Treasury yields are making emerging-market equities less attractive. The US 10-year yield was around 5.24% on Tuesday morning, adding another layer of pressure on global risk assets.

FPIs have pulled out Rs 17,131 crore from Indian equities in September so far, according to depository data cited by News On AIR.

But crude makes the FPI problem worse because it adds another reason for global investors to be cautious about India.

Higher oil prices can weaken the rupee, raise inflation expectations and increase concerns over India's current account and fiscal position. For foreign investors, that means greater currency and macroeconomic risk.

So, while FPI selling may be the immediate trigger behind some of the market's sharp moves, crude is increasingly becoming part of the deeper macro story.

For investors, the important question is not whether crude is at $106 or $107 on any particular day. The bigger question is how long prices stay elevated.

A short-lived spike can be absorbed. A prolonged period of $100-plus crude is far more difficult because it can progressively affect inflation, the rupee, government finances, corporate margins and economic growth.

For now, Vijayakumar believes investors should focus on large-cap stocks and avoid rushing into decisions amid the volatility.

That may be particularly relevant because the market is dealing with several pressures simultaneously: elevated crude prices, heavy foreign selling, high US bond yields and geopolitical uncertainty.

In other words, the problem facing Dalal Street is not simply that oil has become expensive. It is that expensive oil can spread through the economy — and eventually show up in corporate earnings and stock valuations.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading choices.)- Ends