Last Updated on Feb 16, 2023 by
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The key fortress supporting the Indian economy
India’s status as a rare bright spot amid the gloom and doom in global economic conditions has been a topic of much discourse for some time now. The global economy is currently battling multiple problems created by the COVID-19 pandemic and the Russian-Ukraine conflict, which has so far affected the economic fabric in much of the developed world. India’s resilience to global headwinds is being celebrated across much of the global investing community.
For the global investor, India stands out due to three key reasons – A large investable emerging market, relatively stable governance and strong fundamental factors. Amidst the global pessimism, the recent World bank forecasts on GDP growth for India, re-iterating the tag of the ‘fastest growing large economy’ is seen as a vindication of India’s economic potential. This current strength and resilience in the economy, in my view, can be attributed to three key areas in the external sector – currency stability, comfortable oil prices, and a reasonable level of inflation.
Oil prices – India’s wildcard
Source: Bloomberg, Axis MF Research (as of 24th November 2022). Disclaimer: Past performance may or may not be sustained in the future. The above graph is used to explain the concept and is for illustration purposes only and should not be used for the development or implementation of an investment strategy.
The basket of crude oil that India imports have remained below the $100 level consistently. India’s decision to continue importing oil from Russia at a deep discount is a major contributor to this trajectory. However, global Brent Crude oil prices have also slipped from the peak of $123 a barrel (on 9th June 2022) to around $85 (24th November 2022).
These sub-$100 prices can help India maintain its growth momentum without being hurt by inflation and currency instability. So far, the Indian government has been very efficient in managing imported inflation through oil despite pressures from outside. One of the moves by the government to contain inflation was to cap the price of diesel and petrol over the past 3-4 months to insulate the economy from the pressure of rising prices. The move by the government to increase the windfall tax on domestically produced oil, hike the diesel export rate, and restart the levy on aviation turbine fuel is a step in the right direction in its endeavour to restrict imported inflation.
As prices cool off, we anticipate the government will allow OMCs to pass on the shortfall costs offsetting losses accrued over the last few quarters. For the economy as a whole, the seamless pass-through of costs has allowed the government to focus on core infrastructure spending without being burdened by subsidies.
Domestic currency and policy action – Stability exemplified
The ability to manage oil prices has also trickled down to better stability in the Indian currency. While several currencies have witnessed sharp depreciation against the US Dollar, especially the Euro and Pound, over the past months, the Reserve Bank of India’s (RBI’s) measures have ensured that the Indian Rupee remains relatively orderly. A stable rupee bodes well for imported inflation as well as foreign investments in the country.
Also, the RBI’s decision to focus on the domestic economy rather than replicating global central bank actions that are on an upward rate cycle spree has resulted in inflation treading in the comfortable range. Since the tightening cycle began in March this year, the RBI has effected around 190-basis points hike against a 300 basis points increase by the US Federal Reserve.
Looking at contingency measures put in place by policymakers, oil prices in the $100-$125 range, we believe, are likely to have a limited impact. However, if rates were to hover over $135 over a long period, it would make it difficult for India to not be impacted by inflation and hence see a dent in its GDP growth momentum. It’s not that we have not seen that kind of price level earlier, but given the conditions that the global economy is headed for, it will be difficult for India to remain completely untouched.
Looking Forward
Private capex shows broad-based improvement, even as government capex slowed for both projects under implementation and new investments. We expect private capex to gain pace supported by domestic fundamentals. Risks have emerged from the global slowdown, leading to a slowdown in external demand. Incoming data for overall projects under implementation (as compiled by CMIE) for QE September 2022 showed stable momentum in overall investment projects, led by a pickup in private projects (highest since March 2012) despite a slowdown in public projects.
Within new investments, whilst private investments accelerated further on a four-quarter trailing basis, public investments decelerated. Sector data across both ongoing and new investments show the highest growth for manufacturing.
Until then, India’s consumption story remains strong, and companies end up benefitting from this positive scenario. This will also ensure the inflow of funds and increased interest from foreign investors, especially as the government and monetary authorities remain increasingly cognizant of the ecosystem and continue to take steps that are beneficial to the domestic economy.
Source: Bloomberg, Axis MF Research (as of 24th November 2022)
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Past performance may or may not be sustained in the future.
Stock(s) / Issuer(s)/ Sectors mentioned above are for illustration purposes and should not be construed as a recommendation.
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Before Axis AMC, Jinesh was associated with Birla Sunlife AMC as Portfolio Manager, where he was responsible for alternative assets across growth, value and dividend baskets. He was associated with this company from June 2008 to October 2009. He was also associated with Voyager India Capital as a Sr. research analyst responsible for BFSI & Infrastructure sector and held a sectorial portfolio manager role for investments. He was with Voyager India Capital from February 2006 to May 2008.
- Currency, Inflation and Oil - Feb 16, 2023
