Falling prices of commodities, especially Brent crude, this year have proved to be a boon for a net importer like India as inflation has started easing and petroleum subsidies are expected to be much lower from a year earlier, reports Banikinkar Pattanayak in New Delhi. Coupled with conducive bases, the drop in key commodity prices (apart from the fall in prices of oil and iron ore, coal and fertilisers, global copper prices, hovering around a six-month low, have shed 11.2% this year) aided a broad-based moderation in India?s inflation, from petroleum products to several items.
The Wholesale Price Index (WPI) hit its lowest since October 2009 at 2.38% in September, while the Consumer Price Index (CPI) dropped to its lowest since inception at 6.46% last month.
Despite a pick-up in Brent prices on Friday beyond $87 per barrel from a four-year trough in the previous session on speculation that the market was oversold, the North Sea crude benchmark has shed around 25% since hitting a nine-month peak in June and just over 21% so far in 2014.
Fuel price rise in the CPI slowed to a record low of 3.45% last month, while retail fuel inflation hit a five-year low. The price of the Indian crude basket dropped to $83.85 per barrel as of Wednesday, down 9% from the average price of $92.02 in the fortnight through October 10. Consequently, the over-recovery from diesel sales, too, went up to R3.56 per litre in the fortnight through October 15 from R1.90 in the previous fortnight, which would have a benign effect on the country’s petroleum subsidy.
Already, the under-recovery on diesel sales is expected to have dropped to R2,848 crore in the second quarter, compared with R9,037 crore in the June quarter, partly aided by a monthly modest hike in its prices.
Despite a pick-up on Friday, analysts said oil prices could remain subdued in the coming weeks due to the reluctance of Opec suppliers to cut output to shore up price as they struggle not to cede share in the export market, especially to non-Opec suppliers like the US and Russia. Encouraged by the lower crude prices, the government could announce a cut in diesel price before Diwali. Relatively lower oil prices wouldn?t just put downward pressure on transport and communication inflation but also serve to drag down headline inflation.
Moreover, as RBI governor Raghuram Rajan has said, if sustained, the fall in oil prices will help further narrow the country’s current account deficit, which hit 1.7% of GDP in the June quarter against 4.8% a year before. The Thomson Reuters Jefferies CRB index, which tracks the movement of 19 key commodities, hit 272.53 by 15.10 GMT on Friday, down 4% from a month before and 1.8% so far this year.