HSBC India says higher oil prices will not cause rupee re-rating; markets await clarity on fiscal deficit

Rising oil prices could pose a microeconomic challenge for India and widen the nation's trade deficit by $10 billion to $25 billion but it is unlikely to impact rupee, bonds and monetary policy, according to experts.

“The higher payouts that we make for oil consumption are not offset by lower imports or some other goods and commodities," said Hitendra Dave, head of global banking and markets at HSBC India. "I think this is the scale of the challenge that trade deficit could widen by a minimum $10 billion and a maximum $25 billion."

"Will that cause a significant re-rating of the currency. I am not very sure about that,” he added. Dave said market awaiting clarity on fiscal deficit in the budget.

Suyash Choudhary, head-fixed income at IDFC MF, said that bond yields should remain stable as term spreads targeting via RBI's ‘Operation Twist’ is on the table.

Choudhary said most factors causing inflation are from the supply side.

“If the situation in the Middle East continues to escalate and crude settles somewhere in USD 80-90 per bbl, we have a bit of a macroeconomic challenge on our hands," he said.

"Now the worry is lack of aggregate demand in the system and we cannot worry about both problems at one time which is higher inflation and lower aggregate demand," he added. The latter implicitly meaning that the economy is growing below trend, said Choudhary.

The right approach for the central bank is to focus on inflation and not consider one-off items such as rupee and oil prices, argued Dave.

“I would draw attention back, I think it was Q4 of 2018 when the then RBI governor essentially clarified that the RBI and the monetary policy committee (MPC) mandate is inflation. I think the current MPC has emphasized that the mandate is inflation with a view to growth and not one-off factors like rupee or oil and that’s a right approach,” he added.

Choudhary said, “It’s difficult to go for a cut right now; even before the escalation in oil prices the near term CPI print courtesy food and specifically vegetable inflation were looking on the higher side. So the print that is due this month will probably be in the area of 6.75 percent odd and the next print also, unless onion prices collapse sharply, will probably be higher than 6 percent.”