As recent geopolitical events continue to affect global crude oil prices, the Reserve Bank of India has emphasised the need to ‘oil-proof’ the Indian economy. An RBI working paper released earlier this week laid emphasis on the need for a policy to promote energy security and sustainability in an oil import-dependent economy like India. The report found strong statistical evidence to back the possibility of extreme changes in global crude oil price being transmitted to sectoral indices of the Indian stock markets.
“The need for oil-proofing the Indian economy – its financial and real sectors, from shocks or adverse geopolitical events cannot be overstated. This also points to the need for a policy for promoting energy security and sustainability…It would also be prudent on the part of regulators to be vigilant of the potential contagion from global crude oil price movements given their wider implications for systemic financial stability,” the report said.
The working paper called for rapid investments in other alternative energy sources where India could be self-sufficient.
Using a non-time varying threshold, the paper attempted to measure the contagion impact of extreme changes in global crude oil prices on 10 composite sectoral indices of the Indian stock markets. Simply put, the ‘contagion effect’ refers to the possible spread of an economic crisis or boom across different regions.
“Of the two oil exceedances – positive and negative, the contagion effect of positive oil exceedances was not only dominating as indicated by the higher magnitude of the positive coefficients but was seen impacting all 10 sectoral stock indices compared with seven in the case of negative oil exceedances,” the paper said. Exceedance is the act or fact of exceeding something, especially a limit or standard.
The findings indicate that there might be other factors prompting a higher and more pervasive contagion on the sectoral stocks in the Indian market – the case in point being the INR/USD market.
“Given India’s import dependence on crude oil and the observed co-exceedances, any negative stock may lead to a decline in market capitalisation and loss of wealth for investors,” the paper said.
The paper titled ”Measuring Contagion Effects of Crude Oil Prices on Sectoral Stock Price Indices in India’ however examined the asymmetric aspect of the contagion effect on sectoral indices only partially.
(With inputs from agencies)