Economy sees a few green shoots

Analysts say gaining rupee, falling prices will help ease inflationary situation.A strengthening rupee and cooling crude oil prices over the past few months are expected to help lower inflation, ease fiscal deficit and give room to the Reserve Bank of India (RBI) to cut interest rates, besides cooling off pump prices of petrol.

The rupee has become the major beneficiary of the government’s latest economic reform steps, gaining close to 3 per cent against the dollar over the past fortnight. Economists are predicting a greater rebound in the Indian currency, which could rise as much as 8 per cent by the year-end, buoyed by some investor-friendly measures announced by the government.

Brent crude prices, which reached a high of nearly $117 per barrel around mid-August, have declined to $110 a barrel, and are expected to remain rangebound. Analysts say that these two simultaneous developments will lower the oil import bill, ease oil prices in the Indian market and ease overall inflationary pressure.

If fuel prices which account for 15 per cent of the wholesale price index come down substantially, it will have a cooling impact on overall inflation. “As long as the rupee keeps gaining in strength and oil prices do not show volatility, we will have a positive impact on inflation, and consequently, government’s revenues,” State Bank of India Economist Brinda Jagirdar told Deccan Herald.

Cooling inflation rates will give enough elbow room to RBI to think about adjusting policy interest rates in its next review scheduled for October 30, she said.

Crisil Chief Economist Deepak Joshi also supported the view that a sustained positive trajectory for the rupee and falling crude prices will eventually help the government achieve higher growth rate for the economy.

Deutsche Bank in a report noted that continuing rupee appreciation and subdued oil prices will give India a “rare sweet spot”, positively impacting its fiscal deficit. According to the government’s own estimates, a $10 rise in crude oil prices can lead to a 1.5 per cent reduction in GDP, especially in developing countries. Conversely, a $10 reduction in oil prices would imply a certain percentage of growth for the economy.

Jagirdar said that the recent reform measures have inculcated a positive sentiment in investors about India regaining its growth momentum and this would have a positive impact on the rupee, going forward. She expects the rupee to trade at Rs 52 to a dollar by the end of 2012. The rupee had hit a four-month-high of Rs 53.47 on September 21 after the government allowed FDI in multi-brand retail, opened up domestic airlines to foreign carriers and gave the go-ahead to divestment in four PSUs.

With the fall in global crude prices, the Indian crude oil basket has fallen to $106.74 on September 20 from $116 on September 14, indicating a cut in pump prices of petrol in the fortnight to September 30. Oil marketing companies have, however, decided to wait and watch before they decide on a price revision.