India may continue to remain a relative bright spot in the world economy with the potential of contributing to global growth this year and in the next. But a couple of headwinds seem to be blowing now that could see the raising of furrows in the brows of Indian economists.
The first is the rising cost of crude oil, all set to breach the psychological $100 a barrel of Brent mark. The other is the US Fed hardening its hawkish stance though it decided to hold the interest rates steady.
There may be no immediate impact on the Indian consumer in terms of the price of fuel at the pump as the government has frozen the rates since May 2020. Also, with elections less than a year away, the chances of fuel costing more at the pump can be safely discounted.
India’s shrewder sourcing practices in buying discounted oil from Russia from the start of the Ukraine war and from Iraq to keep its crude basket average procurement rate lower than that of many other Asian countries will help cushion the blow from oil prices that are climbing steeply owing to Saudi Arabia and Russia being bent on maintaining production cuts till end 2023.
The cause for worry comes from other factors that will come into play despite India’s comfortable current position as a big and growing oil consumer, importer of crude and exporter of diesel to Europe thanks to a sea change in global geopolitics.
Rising oil prices will hit home when they start affecting the Current Account Deficit. With the trade deficit hitting a 10-month high in August, a worsening deficit could put pressure on the rupee, which has already fallen to historic lows. Any further stress on the rupee could mean foreign investors could be driven away from investing in the Indian markets.
The US Fed’s hawkish stance and possible reluctance to lower rates even in 2024 would also mean that bond yields would remain high enough for foreign investors to see them as a better proposition. Indian stock markets, which were on a roll to historic highs most recently, with the benchmark Nifty crossing 20,000 for the first ever time last week, are beginning the pinch now as seen in a 1,600-point drop in three sessions.
While bubbling stock markets are only an adjunct to the general good feeling about the prospects of the economy, none will rush to the aid of the bourses if they tumble. With inflation likely to rise globally in the wake of oil prices upward of $100 a barrel, it remains to be seen how the Indian economy faces these cyclical headwinds.
