LPG Shortage in India: Energy, Inflation and Equity Loop

Key Takeaways:

• LPG shortage triggers a macroeconomic chain reaction, leading to a rise in inflation.
• Due to a disruption in LPG supply, the demand increases, leading to a rise in energy prices
• A rise in LPG prices leads to a rise in inflation.
• Growth stocks suffer, which drag down the equity portfolio of investors.

What Causes a LPG Shortage?

LPG shortage in India is caused by supply disruptions in the Middle East at the Strait of Hormuz, impacting over 60% of imported supply. This supply shortage triggers the chain effect, which may lead to refinery shutdowns if conflicts are not resolved.

Since LPG is a critical household item and industrial fuel in India, the disruption immediately pushed the LPG price upward.

Energy, Inflation and Equity Loop Explained

Step 1: LPG shortage leads to a rise in energy prices

When LPG faces a shortage, the energy prices surge. It not only impacts the cooking gas cylinders, but it also spills over into transportation cost, manufacturing input cost, fertilisers and chemicals industries.

Energy is a core input across various industries, so rising LPG prices increase the cost of doing business, which will be transferred to consumers.

Step 2: Rising energy costs lead to a spike in inflation

Higher LPG and energy costs directly impact inflation. Households pay more for LPG cylinders, and fuel inflation rises.

Companies also pass higher costs to the consumers, and food prices rise due to higher logistics costs.

This creates a cost-push inflation, which is difficult to control compared to the demand-driven inflation.

Step 3: Central Bank Interference

When inflation suddenly rises, the RBI interferes by increasing the interest rate, which leads to reduced liquidity.

RBI measures can help to control inflation, but it also slows down economic growth.

Step 4: Pressure on Growth Stocks

Growth stocks in sectors like technology, startups, and new-age businesses are sensitive to interest rates because:

• Their valuation depends on future earnings
• Higher interest rates reduce the present value of cash flows
• Funding becomes expensive for expansion

As a result, growth stocks often decline during inflationary cycles. However, at the same time, energy sector stocks can perform and offset the losses.

Why Energy Stocks Can Act as a Hedge?

While the growth stocks decline, the value stocks in the energy sector often outperform. That’s why energy stocks can act as a hedge.

How do Energy Value Stocks Benefit?

• Benefit from Higher prices: Companies involved in oil, gas and LPG distribution can increase their sales.

• Strong Cash Flows: Energy companies generate stable and high cash flows during price spikes.

• Low Valuation: Value stocks trade at lower valuations, making them less sensitive to interest rate changes.