India’s New Reality – Oil $120+ Inflation + Poor Infrastructure + Monetary Policy

Oil price risk, India’s perennial weakness, has risen in recent months. While production and shipment risks from Iran and several African countries have impacted the supply side outlook, improved growth prospects in the US and substantial liquidity support from G-3 central banks have helped shore up demand as well, consequently pushing up global crude oil prices by 12% from the beginning of the year.

The risks of higher global oil prices translate to i) inflation and growth ii) current account deficit and rupee and iii) fiscal position of the government with special emphasis on fuel subsidies.

Rising oil prices have already complicated the RBI’s monetary policy decision. The market has been expecting for some time that the central bank will start a rate cut cycle this year, which would help investment and growth. RBI will remain cautious given clear and substantive upside risks to fuel inflation, which can push WPI inflation once again above the 7% mark. We estimate that a 10% increase in fuel prices could pose 100bps DIRECT upside risk to inflation (first and second round impact combined), thereby pushing headline WPI inflation back to 7.5% levels.

The problem on the balance of payments front in FY12/13 would be mostly regarding the financing composition of the current account deficit.

Core infrastructure production growth was weak in January (+0.5%yoy), compared to the outturn in the previous two months (4.6% in December and 6.7% in November). India’s manufacturing PMI eased to 56.6 in February, from 57.5 in January. Real GDP growth fell to 6.1% in Oct-Dec, led by sharp slowdown in industrial sector activity.

The scam ridden Government is focusing too much on its Political Fortunes rather than Economic and Progressive Policies for the Nation under the not so able leadership of a feeble PM, Manmohan Singh.

Leave a Comment