Comparing Exchange Rates And Crude Prices With Auto Industry's Growth
'How rupee-dollar exchange rates and crude oil price variance affects the growth of Indian automobile industry'
India's financial woes are approaching a critical stage. BSE Mid and Small-Cap indices have fallen 8% and 12% respectively since January 2018. The value of almost 1600-1800 stocks is depreciating on a daily basis. Top 350 companies, as per market capitalization, are down by more than 30% from their 13 months high and another 250 are down more than 20% from their peaks in the past one year. The US dollar, worth Rs 63.64 in January, has now touched Rs 68 this month. Crude oil prices are close to $80 a barrel against $69 in January. The stock market is rigorously swinging with Sensex and Nifty struggling to maintain their 35,000 and 10500 mark respectively. The capital is flooding out of our emerging economy with foreign investors pulling out $700 million last month of Indian equities. These situational similarities bring a sense of deja vu with the 2013 economic crises, when the rupee depreciation was at its peak leading to stagnated economic growth, affecting inflation levels, fiscal policies and trade deficit. There is a fear that such a situation might arise again if the Indian policymakers don't come up with a workable plan directly and avoid the stages of selling of dollars in an attempt to underpin the rupee.
The Nuts and Bolts
Crude oil price and rupee-dollar exchange rate are two major variables which have a big impact on the Indian economy. India is a net importer and heavily dependent, approximately 82%, on crude oil imports. The recent geopolitical tensions have created a possibility of the drop in exports by OPEC countries which have initiated crude oil price fluctuations. In the wake of this, oil purchases lead to more outflow of Indian currency in the international market reflecting the widening of current account deficit and fiscal deficit leading to weakening of Indian currency. Moreover, technical advancements in oil production techniques across the globe and especially the US have to lead to a strengthening of the dollar, putting pressure on other currencies. Weak currency lowers the investor confidence leading to lower net capital inflows which pushes exchange rates even lower, making imports expensive and increasing the possibilities of inflation as well as the trade deficit, further posing risks of stagnation or negative growth of an economy.
Talking about the automobile industry in India, a drop in rupee against dollar and crude oil price hike affects the sector directly. An industry which uses a minimum of 35-40% imported products will witness a rise in input prices due to the depreciation of rupee. Higher royalties and interests have to be paid by Indian manufacturers to their parent companies outside India and foreign banks they have borrowed money from. Export costs are significantly affected by rupee slump. Because of these factors, we can presently see many OEM's increasing their product's prices. Due to these decisions and oil price inconsistency, volatility hits the stock market which tends to take more than giving. Oil is a complementary good to the automotive segment. Hence higher oil costs lead to higher energy prices, which has a vulnerable effect on all businesses that are directly or indirectly dependent on energy.
Indian economy had seen its worst performance in the year 2012-13 when OPEC crude oil price in March 2013 was about $106 per barrel and Indian currency was 55 to a dollar leading to lowest growth rate since 2002. The market has seen a revamp since then. The oil prices have lowered and the conversion rates have been moderated leading to a strong growth of the automobile market. Market size, Goods market efficiency, manufacturing capabilities and infrastructure have contributed to increasing the global appeal of India's automobile Industry. By 2020, India is expected to be the third largest automotive market by volume in the world, after China and the US.
Consider CNX Auto Index (representing 92.92% of the free float market capitalization of the stocks forming part of the Automobiles sector) that comprises of 15 stocks that are listed on the NSE, averaging them, scaling them and compare them with exchange rates (from RBI) & crude prices (from OPEC basket price) from March 2013 to present.
But the increasing crude prices and exchange rates are posing a fear of losing out on such projections. Amid the rise of crude costs from $64.47 in December 2017 to $76.62 per barrel recently and dollar rates from Rs 63.92 to Rs 68.26 on respective dates, the CNX auto Index (after averaging and scaling) has declined from 102.76 to 100.24 base points. These fluctuation along with instances such as sudden capital outflows including FPI's withdrawing Rs 4000 cr from equities and Rs 3500 cr from debt markets in April 2018, inflation rise from 4.28 percent in March 2018 to 4.58 per cent in April 2018 and widening of current account deficit to more than 2 percent of GDP last month which need to be funded through capital inflows year after year; instill fear. Strong FedEx reserves and RBI's policies have maintained the liquidity stream for India till now but the fear of withdrawal of monetary accommodation by the US Federal Reserve and raise of short-term rates are being seen as a major risk.
At this point in time when mobility is witnessing a sharp disruption from its conventional ways to the electric-shared-autonomous-connected ecosystem, financial markets will have to be willing to channelise its investments from oil to data and engine to battery. Indian policymakers have endured many such occasions of financial stress. The present battle is fought by stage 2 actions. Whether the India of 2018 is not the India of 2013, only time will tell.
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