Lower Oil Prices: The Inflection Point?
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You might be observing that oil prices have fallen over the past three months. Recently Talking about the Indian subcontinent, the prime beneficiary to this event is the Government of India, which can meet its fiscal deficit targets comfortably. Since diesel subsidies form a major portion of the government’s annual budget, reduction in oil prices will cut down expenditures. Taking advantage of lower oil prices, the Government has proactively deregulated diesel prices. Although this decision was long pending, we need to see if this deregulation continues with increase in oil prices too. Another benefit would be the decline in inflation which has been the main agenda of the NDA during the general elections.
With expected cut down in fiscal expenditure pertaining to subsidies, there is a good opportunity for the government to invest into infrastructure projects, which are long starving for funds. Lower fiscal deficit and softer diesel prices will help RBI in achieving its inflation targets. This would allow it to back the government on reforms and investment by cutting interest rates.
Though these are highly positive developments for the economy, the government has to address numerous other agendas. The Centre has not yet sent out a clear message or guidelines for
Looking at the current fundamentals, we just see the locus of high inflation shifting from higher fuel prices to supply bottlenecks and slow moving reforms. We expect inflation to remain at moderate to high levels till the implementation of reforms improves macro fundamentals.
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However, this wouldn’t be a major worry if the decline in oil prices is due to excess supply or due to shift of the consumption to other energy resources or disagreement within the
This article is submitted by www.moneyworks4me.com
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