Impact of Crude oil prices on Indian stock market: A study of volatility

Abstract

Crude oil is one of the most vital inputs in an economy's production process, hence considered an “engine for the world economy. Traders and investors closely watch the movements in oil prices. Fluctuations in oil prices affect the whole economy, both directly and indirectly, mainly because it is used in transporting goods & services, generating electricity, and running production machinery. So, an increase in oil prices leads to an increase in the prices of all goods & services. Oil demand in the future is not easy to forecast, however it’s often correlated with growth of industrial production. Hence, countries experiencing fast economic growth are more likely to raise their oil demand. Countries like India and China, in particular, are experiencing significant increase in their GDP. In future, emerging economies like India and China are going to consume a greater share of world's crude oil. On a country’s route to economic growth, financial markets, energy, and the economy are all explicitly linked together.” India is the “third-largest oil importer globally, with 9.7 percent of world’s crude oil imports, after China & USA. India's potential for producing petroleum products is not near meeting the petroleum need of the country. Hence it imports around 80 percent of its oil needs. OPEC nations have been India's crude oil imports, accounting for 86% of Indian oil imports. According to the Petroleum Planning and Analysis Cell (PPAC), India imported a little over 198 million tons of crude worth $62.7 billion in 2020-2021, i.e., spent huge amount of foreign exchange. Such massive petroleum products’ import will significantly affect the Economy of India, mainly when prices of crude oil in international market shoot up. Even a slight fluctuation in prices of crude may have both indirect and direct influence on economy of India. We can see immediate effect on the rise of petrol and diesel prices, the paint sectors, tire sectors, aviation sectors, and cement sectors. Because stock market is barometer for an economy and it reflects even little changes in the macroeconomic factors, it’s important to comprehend the fundamental causes of the change in prices of crude and impact of it on stock market.”