Optimism on fall in crude, gold prices

RBI may get comfort in cutting interest rates further

The recent fall in the prices of crude oil and gold is set to narrow the country’s current account deficit (CAD) in foreign trade. This will provide  comfort to the Reserve Bank of India (RBI) in cutting interest rates further.

According to some economists, the CAD might ease to about three per cent of gross domestic product (GDP) in 2013-14, instead of the previous estimate of around four per cent.

“The drop in commodity prices, particularly in gold and crude oil, if sustained, could be a major positive driver for India.

The immediate and most visible impact would be on the current account balance, which could improve by nearly one per cent of GDP in 2013-14, on our estimates,” said Siddhartha Sanyal and Rahul Bajoria of Barclays.

They add that if gold prices remain flat at $1,400 an ounce and Brent crude (oil) remains at $100 a barrel, India’s net import bill for these commodities could fall by nearly $7 bn and $13 bn, respectively. “This would result in net savings of around $20 bn on the CAD, lowering it to $66 bn (3.2 per cent of GDP) and bringing it below our baseline estimate of $85 bn (4.1 per cent of GDP),” they said.

The CAD rose to a record high of 6.7 per cent of GDP in the December quarter on account of heavy oil and gold imports, besides muted export. It was 5.4 per cent of GDP in the previous quarter and 4.4 per cent in the third quarter of last year.

On Wednesday, Royal Bank of Scotland (RBS) said it expected the current account gap to be around 3.1 per cent, due to the declining gold and oil prices. “Prima facie, the reduction in the CAD should provide RBI with greater headroom for policy easing,” said Sanjay Mathur of RBS.

The fall in commodity prices is also very positive for Wholesale Price Index (WPI) inflation. “Commodity price deflation, coupled with a favourable food price dynamic, could push down WPI inflation to five per cent or lower this year. While this is not our base case, we think the decline in inflation momentum seen lately and the ongoing malaise in the real economy have combined to create conditions for further monetary easing than contained in our forecast,” said Taimur Baig and Kaushik Das of Deutsche Bank. The WPI cooled to 5.96 per cent in March, after an annual uptick to 6.84 per cent in February.

RBI had recently said that concerns about the ballooning CAD and the structural nature of the economic slowdown had reduced the room for monetary easing. According to Baig and Das, such hawkish rhetoric would be gradually scaled back by the monetary authorities in the coming months.