It may be early days yet, but the steep drop this week in gold and oil prices is raising more hope than despair in India.
The country has a voracious appetite for both commodities but produces neither in meaningful quantities. India has also been struggling under the burden of rising imports, and stands to gain from a drop, if it can be sustained, and isn’t accompanied by a wider set of conditions that further chill an already-cooling economy.
“The immediate and most visible impact would be on the current account balance, which could improve by nearly 1% of gross domestic product” in the current financial year that began on April 1, said analysts at Barclays.
“A reduction in oil under-recoveries would also reduce the necessity for domestic fuel price hikes, which contribute over 25% to current inflation,” they said. Under-recoveries refer to the subsidies on petroleum products that are shared by oil companies and the government.
Barclays estimates that with gold prices at $1,400 an ounce and Brent crude-oil prices at $100 a barrel, India’s net import bill on these commodities could drop by $20 billion, lowering the nation’s current account deficit for the current fiscal year to 3.2% of GDP from about 4.1%, even if prices of other metals imported into the country stay the same.
In electronic trading in Asia on Tuesday, June Brent futures UK:LCOM3 -1.00% were trading just under $100, while spot gold hovered around $1,362 an ounce.
Indian stock markets appeared to acknowledge the positives from the drop in gold and oil prices Tuesday, as the benchmark Sensex IN:1 +1.21% climbed 0.9% to 18,527.35, despite hefty overnight losses on Wall Street, and broad losses in Asia.
