Economic Roundup, November 16, 2018

Economic Environment

  • October CPI inflation

  • Oil price

  • US dollar

How are the Indian and global economic environments affecting the financial markets?

  • Owing to falling food prices, in October 2018 year-on-year consumer price index (CPI) inflation has dropped to 3.31%, to a level below the Reserve Bank of India’s (RBI) medium term target of 4%. This gives the RBI some time to consider raising interest rates again and most likely the central bank will not raise rates at its next bi-monthly monetary policy committee (MPC) meeting on December 05, 2018. It must be noted, however, that low food prices could pressure the government by having to face frustrated farmers before the next general election in 2019 and by the need for perhaps higher than anticipated minimum support prices (MSP) which could strain the government budget and potentially raise the fiscal deficit threatening the deficit target of 3.3 per cent of GDP in 2018-19.

  • Inflation in India, the rupee, and the macro picture overall are being helped by the steeply falling oil price due to anticipated over-supply in the global market despite, on November 05, 2018, US reimposition of Iran sanctions, which are offset, at least temporarily, by 180-day waivers granted by US to eight countries, including India, to continue procuring oil from Iran. Saudi Arabia is considering a supply cut in December 2018 to hold up the oil price given the surging US shale oil production. The Organization of the Petroleum Exporting Countries (OPEC) and Russia are still discussing, without an agreement yet, if supply should indeed be cut to prevent another oil price collapse due to what could become oversupply, especially given the US oil production surge, if global economic growth slows down weakening demand for oil. US oil production and global economic growth rate hold the key to the oil price looking forward.

  • The US dollar is getting stronger due to a strong economy and the prospect of rising interest rates at home, political uncertainty in Europe over Brexit and Italian decision to end fiscal austerity, and slowing growth in China. This implies headwinds for the Indian rupee countering the tailwinds of the falling oil price and the consequently improving current account deficit (CAD) – leaving the rupee in a mixed situation.

    What to expect from the markets next week?

Indian financial markets will be mixed next week just as they have been this week, digesting the mixed signals from – on the one hand – India’s strong growth, low inflation, the falling oil price and improving CAD and – on the other hand – the strengthening US dollar, the prospect of rising interest rates in the US and the repatriation of US dollars by foreign portfolio investors (FPIs), and the fragile health of the domestic banking and finance sector.

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