Can Greece and oil spoil Indian equity markets?

There was an old classical movie in Kannada – a whole village is under constant fear of leopard attack, but the problems caused by the people themselves are more severe than that of leopard! The "fear of Greece" wiped out hundreds of billions worth global equity values (including India's) several times in the last 5 years. Last week, the Sensex fell 856 points in a single day, one of the biggest falls in the history, as the equity markets across the world were hit once again by the fear of Greece default on loans and the Brent oil price crashing below $50 a barrel.

Greece with GDP of about $242 billion (equal to GDP of Maharashtra state) is a tiny nation, accounts for just about 0.3% of world's GDP. India's exports to Greece averaged about Rs 100 crore per annum in the last 25 years while our total annual exports are around Rs 19 lakh crore now! India's linkages with Greece are also the weakest in terms of capital flows. While the US is expected to grow above 3.2% in 2014 - the best performance since 2005 - China is growing around 7% on $9 trillion GDP base. As long as these two giants (which account for over 1/3rd global economy) continue to grow at the current pace and the whole of Euro zone doesn't fall badly, the Greece economy, which remains 25% smaller than it was 6 years ago and accounts for just 2% of $12 trillion euro economy, is unlikely to shake the world economy and the domestic equities in particular.

The crash in oil prices call for a celebration here as long as the global economy doesn't slip into recession. India imported over $143 billion worth of crude oil in FY2014 and Brent oil price has crashed over 55% in the last 7 months. Even 30% reduction in oil price can reduce oil import bill by over $40 billion per annum. Compare this with addition of only $24 billion to India's forex reserves in whole of 2014 despite over $42 billion worth of Indian equities and bonds purchased by the FIIs. While asset purchases by the FIIs have corresponding liabilities, saving oil bill is a gain without any liabilities!

Thanks to oil price crash, the combined oil under-recovery is now revised downward to Rs 77,000 crore for FY2015 as compared to the actual of Rs 140,000 crore in FY2014. The government was also able to increase the import duties on fuels thrice in a short span of time to mop up close to Rs 15,000 crore per annum. Further, the WPI-inflation is likely to hit negative zone briefly soon.

In FY2008, the US dollar became cheap and the RBI bought dollars worth $78 billion from the markets to shore up India's forex reserves by $110 billion in a single year (the best ever forex accretion in India's history). Such strong fundamentals accompanied the Indian equity markets hitting a record high in FY2008. The RBI has already purchased the US dollar worth over $22 billion during the period April to November 2014. Now the cheap oil would lead to India shoring up forex reserves substantially once again and the domestic equity markets are expected to create another fresh record high with big margin this year.