Key impact on energy prices; must follow the basics of asset allocation

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The key impact of this war for India, it is the rise in energy prices. India imports 4 million barrels of oil per day, and if oil prices increase by $10 per barrel, that means an impact of $40 million per day. Inflation remains a concern and it will also impact our current account deficit – and this will lead to further depreciation of the Rupee. It will also result in a higher budget deficit due to the inability to pass on the increased burden of oil subsidies due to higher oil prices.

Indian markets, which have generated higher returns compared to all other markets, have witnessed the booking of profits by foreign portfolio investors, and they have drawn nearly Rs 1 lakh crore in the past five months .

Following the correction, while Indian markets were previously trading at a premium to their historical valuations, they are now trading close to their historical valuations. But no one knows where the bottom is – everything will depend on how the war goes and when it will end. Therefore, investors should follow the basics of asset allocation. If the correction occurs, they may look to slowly increase their equity allocation and be long-term investors.

One aspect that may reassure investors is the fact that over the past few years the ability of the economy to sustain itself at higher levels of crude oil prices has increased. Also, corporate profitability is good, and companies are deleveraging; this should help markets move forward.

Nilesh Shah is MD, Kotak Mahindra AMC

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