Rising crude oil prices, and a weakening reason for an interest rate cut due to the strong GDP growth, could slow down Indian equity markets that are witnessing strong participation from foreign and domestic institutional investors.
Markets are also insecure about continued prospects after sections in the foreign exchange (forex) market raised concerns on reports that Reserve Bank of India governor Raghuram Rajan may not seek a second term after his tenure ends in September.
But crude is a big worry for investors. While the commodity was down marginally in the past few days, there are estimates that the price may cross $50 a barrel soon and reach $60, a sharp cry from the 13-year lows of $27 a barrel early this year.
Since India imports almost 70% of its crude requirements, any rise in oil prices will inflate our import bill.
“The government is in a peculiar situation. While it has so far raised excise duties despite the rise in crude prices, it now will not be able to push for an interest rate cut as GDP growth has been quite strong. Nowhere in the world do you see growth and a cut in interest rates,” said Shankar Sharma, market expert and vice-chairman First Global.
The RBI is scheduled to announce its monetary policy review on June 7 amid calls for a cut in interest rates. But with the economy having grown 7.9% in the fourth quarter of the fiscal and 7.6% in the whole year, there is little justification for a rate cut, which is typically used to stimulate the economy.
“A sustained rise in oil prices (beyond $60 a barrel) carry macro repercussions,” said Radhika Rao, chief economist at DBS. “The first level of impact will be felt through the current account balance. If exports are slow, wider trade deficit will spill over to the current account deficit. We estimate that the gap would widen to -1.7-1.8% of GDP at $60-$70 a barrel. From a risk perspective, the direction of global crude prices will be important for India.”
The rupee has also seen an impact, partly due to a strengthening dollar and partly also on worries that if the current RBI governor is not re-appointed, his strong policies in controlling inflation, and in cleaning up the banks, may slip.
Hailing Rajan’s measures in a report, Abhay Laijawala of Deutsche Bank said that the last credit policy in April marked the beginning of the transition toward the second leg of an accommodative monetary stance. “…Articulating that the RBI will move from a liquidity deficit stance to neutral, marks the reversal of a six-year stance. This has greater significance than an optical reduction in policy rates.”