Exchange Rate and Crude Oil Price Exposure on Indian Auto-Mobile and Oil Sector Companies after the Crisis of

Transcription

1 Exchange Rate and Crude Oil Price Exposure on Indian Auto-Mobile and Oil Sector Companies after the Crisis of Camellia C. Burman Assistant Professor St. Xavier s College (Autonomous), Kolkata 1. Introduction Crude oil price and rupee dollar exchange rate are the two major macro variables which used to have a major impact on the Indian economy. The massive depreciation of Rupee against Dollar during 2013 almost stagnated the growth of our economy and had caused an unparalleled ripple effect at both macro and micro levels for the Indian economy which impacted the fiscal policies and the inflation level. The exporters gain from the depreciation of Rupee as they get more of the local currency in exchange of the foreign currency. Further, given that India is a net importer and is heavily dependent on import of oil, food items and other necessary raw materials, with a sizeable trade deficit and hence the net impact certainly had to be adverse. The depreciation of Rupee thus reflects wider Current Account Deficit and as well as lower Net Capital Inflows. It can be analyzed that the continuous depreciation of the Indian Rupee and the rising Crude Oil prices are the main reasons for the revised estimate of fuel subsidy. Hence, at micro level, the auto mobile and oil sector companies are directly exposed to the adverse movement of rupee dollar exchange rate and crude oil price. With this backdrop the present study has been initiated to find out the impact of rupee dollar exchange rate and crude oil price fluctuation on Oil and Automobile Companies of India. A drop in the rupee against the dollar directly affects the automobile sector. The reasons are manifold. Firstly, automobile companies are largely depends on imported components. The rise in input prices due to depreciation of rupee which in turn affected the companies belonging to this sector. Secondly, higher amount of royalties has to be paid to the foreign parent firms by few of the companies. Thirdly, financing has been done by a good number of firms through external commercial borrowings and foreign currency denominated convertible bonds. Fourthly, the firms having export sales are significantly exposed to rupee depreciation. Like rupee, dollar exchange rate, crude oil price fluctuation has direct and indirect impacts not only on the global economy but on emerging economies like India as well. More specifically, it affects the volatility of stock market globally. Price rise in Crude Oil has long lasting impacts on industries and businesses across the globe. Crude oil price increase involves higher energy prices, which has an undulating effect on all business sectors that are directly or indirectly dependent on energy. India imports three quarters of its annual Oil and gas requirements with the Middle East and North Africa regions contributing to a substantial chunk of it. Owing to the importance of fluctuations in the Exchange Rate and Crude Oil Prices on a country s economy, the present study tries to capture the impact of Exchange Rate and Crude Oil Price fluctuations on the Oil and Automobile Companies of India after the Financial Crisis of Literature Review There are several kinds of shocks that cause aggregate fluctuations in an economy. One of the identifiable sources of shock that has attracted the attention of many economists is the Oil price shocks. Authors such as Pindyck (1979) [8], Hamilton (1983) and Olson (1988) [7], suggest that this type of Oil shock does not only affect the business cycle but also affects the growth of an economy thereby causing economic fluctuation. Also, there is extensive range of studies made by Mork (1989 and 1994) [4-5] that deal with an asymmetric relationship between Oil prices and aggregate economic activity. Such asymmetry is caused by adjustment costs, financial stress, and monetary policy to mention a few. Kenichi Ohno (1990), found that when the exchange rate fluctuates and the market exhibits hysteresis, planning horizons of domestic and foreign competitors will matter in the determination of pass-through as well as relative market shares of these firms. Using the Cournot Duopoly model, it is shown that if the foreign exporter is a long-term maximizer relative to the domestic firm, pass-through will be lower and average export penetration higher than otherwise. Lutz Kilian (2008) [3], analyses the Oil supply shocks that are exogenous with respect to global macroeconomic condition in respect of seven major industrialized economies i.e. the G7 countries. The study reveals that a temporary reduction in real GDP growth is associated with an exogenous Oil supply disruption. It has been determined that an exogenous Oil supply disruptions need not generate sustained inflation or stagflation. Typical responses in this case include a fall in the real wage, higher short-term interest rates, and a depreciating currency with respect to the dollar. It has been found out in this study that, despite qualitative similarities, there is strong statistical evidence that the responses to exogenous Oil supply disruptions differ across G7 countries. The above studies basically focuses on the impacts of the oil price shocks and fluctuations in the exchange rate on the various dimensions of the economy and tries to establish the fact that factors that influence the growth of a country. 3. Objectives The following objectives are desired to be achieved through the research study: To analyse the impact of Crude Oil Prices on the Market Price of Stocks of the Oil Refinery Companies and the Automobile Companies in India after the Financial Crisis of To determine the effect of fluctuations in the Exchange Rate (INR/USD) on the Market Price of Stocks of the Oil International Journal of Commerce and Management Research, Toll Free:

2 Refinery Companies and the Automobile Companies in India after the Financial Crisis of Data and Methodology To study the impact of Exchange Rate fluctuation and Crude Oil price movement on Stock Price at firm level, the study picks up seven companies from Oil industry and seven companies from Automobile industry of National Stock Exchange of India. The companies from Oil industries are: Bharat Petroleum Corporation, Chennai Petroleum Corporation, Essar Oil, Hindustan Petroleum Corporation, Indian Oil Corporation, Mangalore Refinery and Petrochemicals and Reliance Industries. The companies from Automobile industries are: Ashok Leyland, Bajaj Auto, Eicher Motors, Hero Moto Corp, Mahindra & Mahindra, Maruti Suzuki India and Tata Motors. INR/USD and OPEC Basket Crude Oil price is used for this study. The Stock Price data has been collected from National Stock Exchange s historical data base. RBI reference rate has been used for INR/USD Exchange Rate and OPEC Basket Price has been taken as a proxy for Crude Oil Price, which is downloaded from the OPEC website. The sample period of the study has been selected from July 2009 to June 2016 i.e., after the recent financial crisis period of The daily returns for the individual series are calculated based on the logged difference as below: R it = [Ln (P it) Ln (P it-1)]..equation..(1) Initially, correlation coefficients have been computed of the log values of the return series of individual stock return of different companies with INR/USD and Crude Oil. It has been observed that there exist correlations amongst different variables during the sample period. However, such results do not necessarily imply, true existence of such dependency as in many cases they may yield spurious results. Accordingly, further investigation is necessary to establish the inferences drawn from the correlation results. Regression Analysis: The study applied the following regression model to find out the impact of both Exchange Rate and Crude Oil price movement on Stock Return of individual firm.. Equation (3) where, i=1,...,14 and t=1,...,966, where the coefficients β mi, β ER i and β Oil i represent a measure of sensitivity of Stock Return, i, to Market Risk, Exchange Risk and Crude Oil price risk; ε it is the disturbance term. The introduction of Market Returns, R mt, as a third independent variable, explicitly controls market movements, thereby reducing any correlation between disturbances. The potential problem of multicollinearity may arise in estimating such a three factor model from the possibility that the market, Exchange Rate and Oil Price factors are correlated. In order to control this problem, the Exchange Rate and Oil price factor has been orthogonalized by using the approach of Bris et al. (2004) [2] and Kiymaz (2003) [2]. Firms Exchange Rate exposure as well as exposure from Oil prices fluctuation was estimated by following a two-step procedure. In the first step, the Return of Market Portfolio is regressed on the changes in the Exchange Rate Return and Crude Oil Return as shown by Equation (4),..Equation. (4) Then, the component of the Market Portfolio Return that is orthogonal to the changes in the Exchange Rate Return and Crude Oil Return is obtained by calculating..equation (5) Finally, firms Crude Oil and Exchange Rate exposure is estimated by regressing firms Stock Market Returns on the changes in the Crude Oil Price and Exchange Rate and orthogonal component of the Market Portfolio, as illustrated by Equation..Equation. (6) Where is the Stock Return of firm i, is the estimated orthogonal component of the Market Portfolio (CNX Nifty 50), and is the percentage change in the Exchange Rate index (INR/USD) over the same period and is the percentage change in the Oil price (Crude Oil Price) over the same period. The value obtained for for the different firms can be interpreted as the level of exposure to Foreign Exchange Rates, since it indicates the sensitivity that a stock shows towards these fluctuations. Similarly, the value obtained for for the different firms can be interpreted as the level of exposure to Crude Oil rates, since it indicates the sensitivity that a stock shows towards these fluctuations. The above regression model is used to examine the levels of exposure to Foreign Exchange Rate changes and Crude Oil price changes that should be reflected in the statistical significance of the coefficient and (two-tailed test) and the direction of such exposure, which is indicated by the sign that accompanies the coefficient. A positive coefficient ( ) means that Stock Return increases when the Indian Rupee is depreciated against USD. Similarly, a positive coefficient ( ) means that Stock Return increases when the Oil price is increased and vice versa. 5. Analysis and Interpretation of the Data Correlation: Table 1: Correlation of Nifty Return with Crude Oil Return Particulars Nifty Crude Oil Nifty ** Crude Oil 0.362** 1 **Correlation is significant at the 0.01 level (2-tailed). Table 2: Correlation of Nifty Return with Exchange Rate Return Particulars Nifty Exchange Rate Nifty ** Exchange Rate ** 1 **Correlation is significant at the 0.01 level (2-tailed). The results obtained from Table 1 reveals that there is a positive as well as statistically significant but weak correlation between Nifty Return and Crude Oil Return. Therefore, it can be stated that if the Crude Oil Price rises the International Journal of Commerce and Management Research, Toll Free:

3 Nifty will rise and if the Crude Oil Price falls the Nifty will also fall. The result from Table 2 indicates that there is a negative as well as statistically significant correlation between Nifty and Rupee-Dollar Exchange Rates. This indicates that if Rupee value appreciates the Nifty will rise and if Rupee value depreciates Nifty will fall. Table 3: Oil Companies: (Correlation) Serial Number Companies Crude Oil Exchange Rate Nifty 1 Bharat Petroleum Corporation * * 2 Chennai Petroleum Corporation 0.107* * 0.341* 3 Essar Oil 0.235* * 0.571* 4 Hindustan Petroleum Corporation * * 5 Indian Oil Corporation * * 0.209* 6 Mangalore Refinery and Petrochemicals 0.201* * 0.556* 7 Reliance Industries 0.172* * 0.485* From Table 3, we can infer that the correlation between Stock prices of Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Indian Oil Corporation Crude Oil price are negative and statistically significant. This implies that if there is an increase in the Crude Oil Price then there will be a decrease in the Stock price of these companies and vice-versa. On the other hand we find that the Stock price of Chennai Petroleum Corporation, Essar Oil, Mangalore Refinery and Petrochemicals and Reliance Industries are positively but weakly correlated to the Crude Oil Return. From table 3, it is also evident that the Stock Return from Chennai Petroleum Corporation, Essar Oil, Indian Oil Corporation, Mangalore Refinery and Petrochemicals and Reliance Industries are negatively correlated to the Exchange Rate Return. This indicates that as the Return from Exchange Rate increases there is a decrease in the Returns from the Stock of all the companies and vice-versa. Hence, if Rupee value depreciates the Return from the Stocks of the companies will fall. The correlation between the Return from Nifty and the Return from the Stocks of all the seven companies are significant and positive. Table 4: Automobile Companies: (Correlation) Serial Number Companies Crude Oil Exchange Rate Nifty 1 Ashok Leyland 0.133* * 0.396* 2 Bajaj Auto 0.078* * 0.282* 3 Eicher Motors 0.160* * 0.324* 4 Hero MotoCorp 0.069* * 0.370* 5 Mahindra & Mahindra 0.130* * 0.422* 6 Maruti Suzuki India 0.132* * 0.460* 7 Tata Motors 0.150* * 0.338* In Table 4, the correlation between the Crude Oil Price and the Stock price of all the seven Automobile companies are significant and positive. It has also been observed in table 4; that the Stock Return from all the automobile companies is significant and negatively correlated to the Exchange Rate Return. This indicates that as the Return from Exchange Rate increases there is a decrease in the Returns from the Stock of all the companies and vice-versa. Thus, it may be said that as the Rupee value depreciates the Return from the Stocks of the companies will fall. The correlation between the Return from Nifty and the Return from the Stocks of all the seven Automobile companies are significant and positive. Regression Results: Table 10: Oil Companies Dependent Variable: Nifty Return Method: Least Squares Serial Number Companies Variable Coefficient Standard Error t-statistic Probability Crude Oil * Bharat Petroleum Exchange Rate Corporation Market Residual * C Chennai Petroleum Corporation Crude Oil Exchange Rate * Market Residual * C International Journal of Commerce and Management Research, Toll Free:

4 3 Essar Oil Hindustan Petroleum Corporation Indian Oil Corporation Mangalore Refinery and Petrochemicals 7 Reliance Industries Crude Oil * Exchange Rate * Market Residual * C Crude Oil * Exchange Rate Market Residual * C Crude Oil * Exchange Rate * Market Residual * C Crude Oil * Exchange Rate * Market Residual * C Crude Oil * Exchange Rate * Market Residual * C Based on the results depicted in table 10; we can infer that out of seven selected companies from oil sector five companies are exposed to rupee dollar exchange rate and six companies are exposed to change in crude oil price. The regression coefficients between stock prices and exchange rate are negative and statistically significant implies that depreciation in rupee against dollar has a negative impact of stock prices. Crude oil price movements have a positive impact on stock price of three companies from oil sector namely; Reliance Industries, Mangalore Refinery and Petrochemicals and Essar Oil, while the other three companies are negatively exposed to crude oil price movements. Table 11: Automobile Companies Dependent Variable: Nifty Return Method: Least Squares Serial Number Companies Variable Coefficient Standard Error t-statistic Probability Crude Oil * Ashok Leyland Exchange Rate * Market Residual * C Crude Oil Bajaj Auto Exchange Rate * Market Residual * C Crude Oil * Eicher Motors Exchange Rate Market Residual * C Hero MotoCorp Mahindra & Mahindra Maruti Suzuki India Tata Motors Crude Oil Exchange Rate * Market Residual * C Crude Oil * Exchange Rate * Market Residual * C Crude Oil * Exchange Rate * Market Residual * C Crude Oil * Exchange Rate * Market Residual * C International Journal of Commerce and Management Research, Toll Free:

5 Based on the results depicted in table 11; we can infer that out of seven selected companies from Automobile sector six companies are exposed to rupee dollar exchange rate. The regression coefficients are negative and statistically significant implies that depreciation in rupee against dollar has a negative impact of stock prices. The crude oil price has significant and positive exposure to five automobile companies. 6. Findings and Conclusion The current research deals with the impact of Crude Oil Prices and the Exchange Rate on the Stock Prices of the selected Oil companies and the Automobile companies of India with the study period beginning from July, 2009, ending on June The study noticed that the Crude Oil has a positive and statistically significant impact on the Stocks of some of the Oil companies namely, Essar Oil, Mangalore Refinery and Petrochemicals and Reliance Industries which implies that as the Crude Oil Price increases the Return from the Stocks of these companies would increase. Whereas the Return from Crude Oil Price has a negative impact on the Return of the Stocks of Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Indian Oil Corporation which implies that with the increase in the Return from the Crude Oil Price there would be a decrease in the Return from the Stock Prices of these companies. This may be because Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Indian Oil Corporation are subsidised. These three companies face a liquidity crunch perennially. Subsidies are administered through these undertakings. However, it is rarely met in full. We also find that the Crude Oil price fluctuation has a positive impact on the stock price of Ashok Leyland, Eicher Motors, Mahindra & Mahindra, Maruti Suzuki India and Tata Motors. This indicates as the Crude Oil Price increases the Return reaped from the Stock of these automobile companies also increases. But the Crude Oil price does not have a significant impact on the Stock price of Chennai Petroleum Corporation, Bajaj Auto and Hero MotoCorp which indicates that any increase or decrease in the Crude Oil Price will have no impact on the Stock Prices of these three companies. The results of the study also matched with the previous studies by Maghyereh (2004), Park & Ratti (2008), Apergis & Miller (2009) and Khan (2010), which suggest that Crude Oil Price Shocks may not have any impact on certain Stock Prices of a country. The study also finds that the Exchange Rate has a negative impact on the Stocks of Chennai Petroleum Corporation, Essar Oil, Indian Oil Corporation, Mangalore Refinery and Petrochemicals and Reliance Industries among the oil companies and all the automobile companies except Eicher Motors. Hence, as the Exchange Rate increases the Return from the Stock of the companies would fall. An increase in the Return from Exchange Rate means that Rupee value depreciates. So we find that as Rupee depreciates the Return from the Stocks of these companies also decline. Hence, it strengthens the purported fact that India is a net importing country. But for Bharat Petroleum Corporation, Hindustan Petroleum Corporation and Eicher Motors the Return from the Exchange Rate has no significant impact on the Return from their Stock Prices. It means that any fluctuation in the Exchange Rate would have no impact on the Stock Prices of these companies. Therefore, it may be said that these three companies are well managed in terms of any adversity arising due to fluctuation in the Exchange Rate. A rise in Crude Oil Price and a rise in the Exchange Rate i.e. depreciation of Rupee increases the risk of the Oil and Automobile companies as well as the risk of the investors. The import costs for the Oil companies would drastically rise if the Crude Oil Price and Exchange Rate both increases as India is a net importer of petroleum products, also the import costs for Automobile companies would also increase if there is an increase in the Exchange Rate i.e. if Rupee depreciates. The investors are more exposed to the uncertainty of the return from their investments as the risk increases. The results obtained from this study may be useful for the managers of the companies in order to determine the trend of the Return from their Stocks in case there are fluctuations in the Crude Oil Price and Exchange Rate. Also the hedgers and speculators may be benefitted as the results may be helpful for their portfolio decision making. 7. References 1. Bris Y Koskinen, Pons V. Corporate Financial Policies and Performance around Currency Crises, Journal of Business, 2004; 77(4): Kiymaz H. Estimation of Foreign Exchange Exposure: An Emerging Market Application, Journal of Multinational Financial Management. 2003; 13(1): Kilian L. A Comparison of the Effects of Exogenous Oil Supply Shocks on Output and Inflation in the G7 Countries. Journal of the European Economic Association. 2008; 6: Mork KA. Oil and the Macro economy when Prices Go Up and Down: An Extension of Hamilton's Results. Journal of Political Economy. 1989; 97: Mork KA. Business Cycles and the Oil Market. The Energy Journal, Special issue The Changing World Oil Market. 1994, Ohno K. Exchange Rate Fluctuations, Pass-Through, and Market Share. Staff Papers - International Monetary Fund, 1990; 37: Olson M. The Productivity Slowdown, the Oil Shocks, and the Real Cycle. The Journal of Economic Perspectives, 1988; 2: Pindyck RS. The Structure of World Energy Demand. The MIT Press, Cambridge, MA International Journal of Commerce and Management Research, Toll Free: