How does high oil prices affect the economy, the stock markets and you, as an investor? Here is a low-down.
The US-Iran war has prolonged, and several questions may be playing out in your minds on where this will all lead to. Hereâs all what you need to know as an investor and as a consumer:
Oil Prices Are Hovering Above $100 A Barrel. Why Should I Worry About It?
Firstly, there is uncertainty about whether or when the war will end.
Secondly, crude oil prices have risen by over 80 % since January 1. It stands much higher now when compared to the $65-$75 levels seen last year. This has implications for the governmentâs finances, industries, consumers as well as investors.
In its monetary policy report published on April 8, the Reserve Bank of India (RBI) assumes average oil price of $85 a barrel in 2026-27 for its various economic projections, indicating that we need to be prepared for a âhigher for longerâ situation.
Why Is There So Much Noise Over Just One Product Becoming Costlier?
Oil cannot be seen as just one product. Crude oil has a lot of derivatives used as inputs in various industries ranging from paints and plastics to chemicals, consumer goods and tyres. Rise in oil prices create a spillover effect on these derived products.
This apart, attacks on gas facilities in the Middle East have resulted in short supply for key user industries such as fertilizers. Gas availability for domestic and commercial use has been impacted too, pushing up prices. Even if the war ends, supply side issues will take time to resolve.
Higher freight costs for importing these commodities too, will be here to stay.
How Do Costlier Inputs Impact Companies Whose Shares I Hold Or Stocks In My Mutual Fund Portfolio?
It will affect their profit margins. If a company wants to maintain the margins, it will have to resort to increasing end-price to the customer. When price increases, demand for the products will be dented. In practice, companies usually pass on some cost increases while retaining the rest. This invariably impacts profits and shareholdersâ earnings take a hit.
Larger companies which have higher pricing power and bigger margins can survive these situations better than the rest. Small and mid-sized companies who already operate on thin margins will take a harder knock on their financials.
How Does It Impact Me As A Consumer?
High oil prices eventually result in costlier petrol and diesel for us consumers, though for now, the government is holding back.
Usually, food and fuel are two keenly observed components of inflation.
While the war has pushed up fuel prices, the forecast of a below-normal monsoon during June- September this year is not good for food prices. Lower supply can drive up food inflation too.
Another aspect is that when companies pass on their cost increases to you, general price levels go up. A sustained rise in prices of various goods leads to the overall inflation levels in the economy moving northward. Sustained inflation brings down the value of money, as you will have to spend more to buy the same goods.
I Understand The Impact On Consumers And Corporates. What Happens To The Economy?
Economic growth suffers.
Most of Indiaâs oil & gas requirements are imported and are paid for in US dollars. When their prices go up, we must spend more dollars to procure them. Greater demand for dollars to pay for the imports pushes up its value (appreciation) but brings down the value of the rupee (depreciation) which is used to purchase the dollars.
Put together, Indiaâs imports always exceed our exports. Hence, when the rupee depreciates, we end up paying more even for all other goods/services that are imported.
Usually, the RBI targets inflation to be in the 4-6 % range. It does not expect inflation to exceed this range in 2026-27 presently. But if inflation moves beyond the comfort zone, interest rates will have to be raised. A rise in interest rates will reduce the money supply in the economy and bring down demand. If a bank is offering you a high interest rate on a Fixed deposit, wouldnât you rather save than spend? Or, if the interest rate on a loan is higher, wouldnât you think twice before borrowing to spend? When demand lowers, prices come down, eventually bringing down inflation. This is the logic.
The flip side is that economic growth suffers in the process. Private consumption (ie what you and I buy) comprises more than 60% of our economy and when consumer demand is down, growth cools off. When costs are high and demand is low, companies too donât invest for future growth.
Why Should I Bother About The Economic Impact?
Because it has implications on the way you spend and save.
If you are an investor, a weaker rupee implies costlier raw material imports for companies even if these are not crude oil – based materials. If interest rates go up, borrowing costs for companies will increase. Corporates with high debt will see rising interest costs also impacting earnings.
As a consumer, a weaker rupee makes travel and study abroad more expensive. When interest costs rise, your loans become costlier. Slower economic growth leads to lower job creation. Finding employment will become tougher.
How Will These Economic Factors Affect Stock Markets?
Markets may continue to be volatile.
Prior to the conflict, Indiaâ s economic growth was expected to be in the 7-7.5 % range for 2026-27. Now the RBI as well as economists peg it at 6.5- 6.9 %. Until March 1, India was a high growth- low inflation economy with an expected pick-up in corporate earnings. Now, the equation has changed completely to a lower growth- higher inflation economy with an expected hit to corporate earnings.
This implies that markets may not rapidly scale peaks like the post-Covid period. It will rather be a slow grind.
What Can Bring About Positive Changes In Stock Market Conditions?
Markets can see a positive change if foreign investors find our equity markets attractive enough to bring back their money. The Middle East crisis has resulted in foreign investors moving to âsafe havenâ assets such as US government bonds (treasuries).
Following the war, global economies too are staring at a slowdown now. Even at sub-7 % growth, the Indian economy may still stand out, presenting a good investment opportunity for foreign investors.
Corporate investments for growth (called private capex) also sends out strong signals to investors that companies are sanguine about future growth. While it did show signs of picking up prior to the conflict, a continuation of this trend will boost investor sentiments.
How Should I Navigate This Uncertain Phase As An Investor?
The market has run-up now from the lows seen in March. You need to be selective in your investment approach. Chasing past winners (in terms of stocks/ sectors/ market cap segments) today will not lead to wealth creation. Given the changed macro-economic situation, a bottom-up approach, choosing the next set of winners from here-on, will.
If you wish to start with your investment journey toward saving Rs 1 crore and beyond with Milestones2Wealth, reach out to us today!
