A Study on the Effect of Oil Price on Stock Returns of the Renewable Energy Firms in India

Abstract

The renewable energy share is increasing the total energy consumption. A substantial growth in the renewable energy generation is seen in India which is going to be one of the most renewable energy producer in the world. Like other sector, renewable energy sector’s stock return reaction to crude oil price is studied which is growing due to the increasing importance of renewable energy sector. This is an incremental study at firm level and in the context of India. The study period was from January 2009 to March 2022. All renewable energy firm listed in the National stock Exchange of India are considered for the study. The renewable energy sector or industry can be divided into sub-sectors such as solar, wind, etc. But, most Indian renewable energy firms deal in different business activities. Thus, all renewable energy firms are categorized into four sub-group, such as firms dealing in renewable energy products and services, standalone firms dealing in renewable energy production, firms dealing in both renewable and non-renewable energy production, firms dealing in renewable energy and other businesses. For crude oil price, the Indian basket oil price is considered. In first objective, the effect of oil price change has a direct relationship with stock return in all market conditions in the whole sample of Indian renewable energy firms. The direct effect of oil price change on stock return sees a declining trend in the case of firms dealing in renewable energy and other business activities. In remaining sub groups of renewable energy firms, the direct effect of oil price is seen without any particular trend. And this effect is found in all market conditions. In the second objective, oil price uncertainty has an indirect effect in bearish market conditions and a direct effect on stock returns of Indian renewable energy firm in the extreme bullish market conditions. In the sub groups, oil price uncertainty has an indirect effect in bearish market conditions and a direct effect during normal and bullish market conditions on stock returns. No asymmetric effect of oil price uncertainty on stock return is observed. In third objective, the oil price asymmetric effect only on stock returns of the standalone renewable energy production firms is seen in the short run. In the long run, the asymmetric effect is found in the whole sample and other sub-groups of renewable energy firms, except firms dealing in production of renewable and non-renewable energy firms. In fourth objective, oil supply shock has a direct relationship with stock return only in bullish market condition in the whole sample of renewable energy firms. This pattern is seen in the sub-group of firms. In normal market condition, demand specific to oil price shock has a direct effect on stock return. This interaction is seen in bearish market conditions also. In the case of standalone renewable energy firms, this relationship has a strong presence. In the remaining market conditions, the structural oil shocks have an inverse relationship with stock return. The result of the study will also be helpful to the investors and portfolio managers to maximize the investment return by observing the possible movement in stock prices of the renewable energy sector firms. The government and the regulatory authorities can understand the behavior of the renewable energy sector stocks in response to oil price. They could frame appropriate policies to ensure investment growth in this sector.