Markets not fully pricing in rising crude oil price-led inflation: Analysts

In the past one month, the BSE Sensex and the NSE Nifty, shed over 6 per cent each, while crude oil prices soared to an eight-year high at almost $96 a barrel, up nearly 12 per cent.

At a time when the global markets are facing multiple headwinds such as the possibility of faster-than-expected hike in rates by the global central banks, especially the US Federal Reserve (US Fed) and the ongoing geopolitical tussle between Russia and Ukraine, and the rising crude oil prices, the Indian markets, analysts say, are still not fully factoring in the rising crude oil prices and its impact on inflation as the government has kept the auto fuel prices unchanged in the backdrop of ongoing state elections.

“The markets have not fully factored in the rise in crude oil prices. A rise to $100 a barrel will be sentimentally negative and can trigger a correction. All this will be bad news for the economy and the fiscal math. It will also dent fiscal 2022-23 (FY23) earnings of India Inc, especially those firms that use crude oil and oil derivatives as an input,” said G Chokkalingam, chief investment officer and founder, Equinomics Research.

In the past one month, the S&P BSE Sensex and the Nifty50, have lost over 6 per cent. Crude oil prices (Brent), on the other hand, hit an eight-year high at almost $96 a barrel, up nearly 12 per cent.

“At the current levels, the markets are not factoring in the possibility of a rise in inflation and are being guided by the Reserve Bank of India’s (RBI’s) forecast rather than what is happening at the ground level,” said U R Bhat, co-founder & director, Alphaniti Fintech.

Higher commodity prices, an increase in fuel pump prices (likely from March after state elections), services’ reopening pressures and elevated household inflation expectations are upside risks to inflation, believe analysts at Nomura, who expect headline inflation to average 5.8 per cent in FY23, above the RBI’s forecast of 4.5 per cent.

Meanwhile, India’s retail inflation hit 6.01 per cent in January, while the wholesale price inflation (WPI) rate remained in double digits for the tenth consecutive month at 12.96 per cent though down marginally from 13.56 percent recorded in the preceding month, recent data releases showed.

“The increase in CPI inflation was largely driven by an adverse base effect and continued supply side constraints. With commodity prices, especially oil, rising, the supply-side disruptions along with rising input costs pressures will keep inflation higher over the coming months. We expect CPI inflation to remain elevated in the 5.5-6 per cent range until April 2022, before easing towards 5 per cent from the June 2022 quarter onwards,” said Tanvee Gupta Jain, economist, UBS Securities.



Those at Quant Eco Research, too, expect inflation pressures to persist. Going into FY23, they see the possibility food, core, fuel-related inflation as the proximate drivers of the overall headline inflation.

"While easing of supply chain disruptions, favorable statistical base effect, capex-oriented government spending, and interest rate normalisation would argue for a sizeable deceleration in CPI inflation, there could be upside form a catch up on pass-through of elevated input prices as organic economic recovery strengthens," they wrote in a recent note.

Given the developments, analysts at BofA Securities have cut their December-2022 Nifty target to 17,000 from 19,100 earlier.

“Our US economists now expect a fast Fed hiking cycle, with 175/100 basis point (bp) hike in calendar year 2022/2023. Fed/RBI hiking cycles since 1994, suggests market valuations could contract. That said, past cycles also suggest market downsides are blunted if supported by robust earnings growth. India is well-placed and is supported by 'growth-focused' fiscal/monetary policies,” wrote Amish Shah, head of India Research at BofA Securities in a recent note.