Asian stock markets are higher today as Japanese and Hong Kong shares show gains. The Nikkei 225 is up 0.5% while the Hang Seng is up 0.5%. The Shanghai Composite is trading down by 0.2%. US stocks closed higher on Thursday on renewed hope that a resolution to a trade dispute with China could be on the horizon. Investors also cheered strong quarterly results from Walmart and Cisco Systems.
Back home, India share markets have opened the day on a strong note. The BSE Sensex is trading up by 221 points while the NSE Nifty is trading up by 56 points. The BSE Mid Cap index opened up by 0.6% while BSE Small Cap index opened the day up by 0.5%.
The rupee is currently trading at 70.23 to the US$.
All sectoral indices have opened the day in green with metal stocks and realty stocks witnessing maximum buying interest.
In the news from the economy. As per an article in a leading financial daily, the slump in the value of the rupee is expected to jack up the oil import bill by at least US$26 billion in the current fiscal.
Things could get worse if the US sanctions on Iran, which would come into effect from November, push up global crude prices.
At the beginning of the financial year, it was estimated that the crude oil import bill to be around US$108 billion at an average crude oil price of US$65 per barrel and exchange rate of Rs 65 per dollar.
But the exchange rate has been at an average of Rs 67.6 till August 14.
If the rupee is to stay around Rs 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be US$114 billion, the reports noted.
The finance ministry said if the rupee stays around current levels, the government would have to consider cutting taxes on petroleum products.
India, which imports over 80% of its oil needs, spent US$87.7 billion on importing 220.43 million tonnes (mt) of crude oil in 2017-18. For 2018-19, the imports are seen at almost 227mt.
Besides, it will lead to a hike in the retail selling price of petrol, diesel and cooking gas (LPG).
The rupee has been among the worst performing currencies in Asia, witnessing an 8.6% slump so far this year.
Fanned by a higher oil import bill, India’s trade deficit, or the gap between exports and imports, in July widened to US$18 billion, the most in more than five years.
Trade shortfall puts pressure on the current account deficit (CAD), a key vulnerability for the economy.
The rupee’s depreciation will result in higher earnings for exporters as well as domestic oil producers such as Oil and Natural Gas Corporation (ONGC) who bill refiners in dollars.
But this would result in a rise in petrol and diesel prices, with the full impact likely to be felt later this month. Though oil firms fix the retail selling price of petrol and diesel on a daily basis, the inputs are an average of the previous fortnight. So, the rate now is based on the average benchmark of international oil prices and the exchange rate of August 1-15. As the rupee in the beginning of the month was at 68.3-68.6 a dollar, the exact impact of the current depreciation is not visible.
Speaking of crude oil prices, whenever oil prices have surpassed US$ 100/barrel, they didn’t stay there for very long.
In technical term, it is sort of ‘resistance level’.
The chart below illustrates the same.
Resistance Kicks in Once Crude Touches US$ 100/barrel
Oil prices have collapsed thrice because of demand destruction: in 1979, 2008, and 2014.
In 1979, the trigger for oil price increase was the Iranian Revolution and the Iran-Iraq war. Due to this, oil prices rose from US$ 50/barrel to above US$ 100/barrel between January 1979 and April 1981.
Then, new production from the North Sea, Mexico, Alaska, and Siberia flooded the market. By March 1986, prices had fallen to US$ 27/barrel.
In 2008, when oil touched US$ 150/barrel, it was quickly followed by the financial crisis and recession.
Then, between 2011 and 2014, when oil was above of US$ 100/barrel, several years of triple-digit oil prices led to a near doubling of shale production in the US, a volume that helped trigger the crash in 2014.
As per the media reports, even Saudi officials think US$ 60 is a reasonable price for oil in the long term.
A spike in oil prices could result in history repeating itself.
Moving on to the news from the steel sector. As per an article in a leading financial daily, JSW Steel Ltd has submitted a resolution plan of Rs 197 billion to the committee of creditors of debt-laden Bhushan Power and Steel Ltd (BPSL).
Besides JSW Steel Ltd, Tata Steel Ltd and Liberty House have also submitted bids to acquire the special steel maker Bhushan Power and Steel Ltd, which is under the insolvency process.
According to reports, Tata Steel has made an offer of Rs 170 billion and Liberty House’s resolution plan is of around Rs 190 billion.
JSW Steel, Tata Group firm Tata Steel and UK-based Liberty House are competing with each other to acquire Bhushan Power and Steel.
Bhushan Power and Steel owes about Rs 450 billion to its lenders. It was among the 12 non-performing accounts referred by the Reserve Bank of India for National Company Law Tribunal (NCLT) proceedings.
Bhushan Power and Steel with a production capacity of 3.5 million tonne per annum (mtpa) is a leading manufacturer of flat and long products.
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This article was originally published in English at www.equitymaster.com
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