Global Investing

India’s finance minister P Chidambaram can be forgiven for feeling cheerful. After all, prices for oil and gold, the two biggest constituents of his country’s import bill, have tumbled sharply this week. If sustained, these developments might significantly ease India’s current account deficit headache — possibly to the tune of $20 billion a year.

Chidambaram said yesterday he expects the deficit to halve in a year or two from last year’s 5 percent level. Markets are celebrating too — the Indian rupee, stocks and bonds have all rallied this week.

But are markets getting ahead of themselves?  Jahangiz Aziz and Sajjid Chinoy, India analysts at JP Morgan think so.

Chinoy and Aziz acknowledge that India could shave up to $25 billion off its annual import bill  if commodity prices do continue falling.  They warn however:

Relying on falling global commodity prices – over which policymakers have absolutely no control — to alleviate India’s external imbalances is tantamount to living on a wing and a prayer. Falling commodities will undoubtedly help this year’s current account deficit but cannot be a “plan” or “strategy” for sustained reduction.

Someone’s loss is someone’s gain and as Russian and South African markets reel from the recent oil and gold price rout, investors are getting ready to move more cash into commodity importer India.

Stubbornly high inflation and a big current account deficit are India’s twin headaches. Lower oil and gold prices will help with both. India’s headline inflation index is likely to head lower, potentially opening room for more interest rate cuts.  That in turn could reduce gold demand from Indians who have stepped up purchases of the yellow metal in recent years as a hedge against inflation.

If prices stay at current levels, India’s current account gap could narrow by almost one percent of GDP in this fiscal year, analysts at Barclays reckon.  They calculate that $100 oil and gold at $1,400 per ounce would cut India’s net import bill by around $20 billion, bringing the deficit to around 3.2 percent of GDP.

For many months now the Russian rouble has been everyone’s favourite currency. Thanks to all the interest it rose 4 percent against the dollar during the July-September quarter. How long can the love affair last?

It is easy to see why the rouble is in favour. The central bank last month raised interest rates to tame inflation and might do so again on Friday. The  implied yield on 12-month rouble/dollar forwards  is at 6 percent — among the highest in emerging markets.  It has also been boosted by cash flowing into Russian local bond market, which is due to be liberalised in coming months. Above all, there is the oil price which usually gets a strong boost from Fed QE.  So despite worries about world growth, Brent crude prices are above $110 a barrel. Analysts at Barclays are among those who like the rouble, predicting it to hit 30.5 per dollar by end-2012, up from current levels of 31.12.

All that sounds pretty bullish. But there are reasons why the rouble’s days of strength may be numbered. First the QE effect is unlikely to last. As we argued here, QE’s impact will be less strong than after the previous two rounds. Analysts at ING Bank point out that in 3-6 months after the launch of QE2 oil prices gained 40 percent, pushing the rouble up nearly 10%. This time oil won’t repeat the trend this time, and neither will the rouble, they say:

Nothing like an oil price spike to bring out the differences between the haves and have-nots of this world. The ones who have oil and those who don’t.

With oil at $124 a barrel,  the stock markets of big oil importers India and South Korea posted their first weekly loss of 2012 on Friday.  But in Russia, where energy stocks make up 60 percent of the index, shares had their best day since November, rising more than 4 percent. The rouble’s exchange rate with the dollar jumped 1.5 percent but the lira in neighbouring Turkey (an oil importer) fell.

Emerging currencies and shares have performed exceptionally well this year. Some of last year’s laggards such as the Indian rupee have risen almost 10 percent and stocks have jumped 16-18 percent. But unless crude prices moderate soon, the 2012 rally in the  stocks, bonds and currencies of oil-poor countries may have had its day. Societe Generale writes: