Although Sensex and Nifty are down sharply from all-time highs, analysts at Morgan Stanley believe Dalal Street appears to be relatively calm.
BSE Sensex and NSE Nifty 50 nosedived, following global markets, amid rising crude oil prices, escalating geopolitical conflict, economic sanctions, and anticipated interest rate hikes. Although Sensex and Nifty are down sharply from all-time highs, analysts at Morgan Stanley believe Dalal Street appears to be relatively calm. “Historically, India’s relative stock prices to EM have reacted poorly to oil price increases caused by supply outages,” Morgan Stanley’s Ridham Desai said in a note co-authored by Sheela Rathi and Nayant Parekh. They added that this time the trend seems to be different from the historic course. Sensex and Nifty fell more than 3% each on Monday morning but soon trimmed some losses.
Sensex, Nifty bucking the trend
Morgan Stanley believes India’s strong policy environment and declining oil intensity are some of the reasons that Dalal Street is faring better. Analysts highlighted that the performance of stocks, compared to other emerging markets, has historically been poor when oil prices increase due to supply outages. This was measured by Morgan Stanley using oil price relative to copper and New York Fed’s oil price dynamics report. “The tight association between these indicators and India’s relative performance to EM appears to be breaking down in recent years,” they added.
India consuming less oil as a proportion of GDP
Domestic market benchmarks are down more than 12% from all-time highs, while crude oil price has soared to around $129 per barrel – highest since 2008. Morgan Stanley said that the 25%+ jump in oil prices will expand the current account deficit by 75 bps and inflation by 100 bps on an annualised basis for India. However, India’s oil consumption relative to GDP is at all-time lows and is steadily declining especially since 2014. This bodes well for the economy. India’s oil consumption as a share of GDP is now marginally below the 10-year average since 2017.
Analysts have added that India’s policy environment is among the strongest in the world, driving India’s growth story ahead. Although the spiking oil prices do pose a threat, but not strong enough in the context of the policy environment.
Foreign investors vs domestic institutions – Changing dynamics
The dependence on Foreign Portfolio Investors (FPI) to fund the current account deficit has also seen a shift. “… since 2014, external funding has shifted dramatically to FDI which is more stable and less sensitive to oil price fluctuation,” Morgan Stanely said. FPIs react more aggressively to the effect of oil prices on shares and their actions feed into the macro creating a vicious cycle.
Additionally, the rising share of domestic investors has also helped in offsetting the risk posed by FPI. Domestic institutional investor flows have been strong enough since the end of 2020 while foreign investor flows have been tepid. In recent months, FIIs have pulled out around Rs 90,000 crore from domestic markets while DIIs have pumped in more than Rs 70,000 crore.
MPC better placed?
Analysts noted that India’s relative real policy rate to the US is at an all-time high. “Monetary policy looks much better placed to handle the inflationary impact from an oil price rise, especially when compared to history,” they added.
Morgan Stanley further added that these factors explain why the rate and currency markets have been relatively stable compared to previous oil shocks, keeping volatility on Dalal Street comparatively lower. The global brokerage firm, however, is still contemplating whether this marks a structural shift for Indian markets or will further change in oil prices send the market tumbling.