The sharp fall in oil and gold prices, after hitting a peak in January, will bode well for the economy and ease the twin deficits?fiscal and current account. It will also moderate the wholesale price-based inflation and may prompt Reserve Bank of India to cut the policy rates faster than earlier expected.
A Bank of America-Merrill Lynch report estimates that a $10 per barrel fall in oil price helps lower the current account deficit (CAD) by 40 basis points while a $100 per ounce fall in gold prices will reduce the CAD by 15 bps. Also, a $10 per barrel fall in oil prices will reduce the fiscal deficit by 25 bps.
As the recent trend in CAD has been led by a sharp increase in import bill of oil and gold?India spends more than 11% of GDP annually in gold and oil imports?the bearish outlook for these items will have a positive impact on the balance of payments.
A Deutsche Bank report says spending on gold would contract sharply this year and a 25-40% downside could reduce India?s gold import bill by at least 1% of GDP in FY14. The actual spending, the report says, could be even lower if consumers, faced with a slowing economy and weakening jobs and income outlook, scale back on gold purchase.
Also, a fall in oil prices is good for the fiscal deficit and will ease the oil subsidy burden of the government. BoAML estimates that for every $10 dollar per barrel drop in oil prices, there could be a reduction in subsidy by around $7.5 billion. And given the current sharing with the oil companies in the country, this could ease the fiscal deficit by 0.25% of GDP.