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Straight from the Specialists

The benefits of falling oil prices for India

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(Any opinions expressed here are those of the author and not necessarily those of Thomson Reuters)

The fall in global oil prices couldn’t have come at a more opportune time for India. In August, oil imports dropped 15 percent year-on-year, driven primarily by a fall of $10 per barrel in prices. Brent has fallen below $100 over the past month, and could slip further. Increasing supplies from the United States and slowing demand are contributing to the weakness in prices.

This offers India several benefits. First, the scope for elimination of diesel subsidy. While the government has been steadily increasing the retail price of diesel in the domestic market, the fall in oil prices has nearly wiped off the need for subsidised support. Assuming the rupee stays stable, the government has a golden opportunity to market-link diesel prices.

Secondly, this would help tame inflation. Falling fuel prices have a direct effect on inflation, whereas indirectly they lower production costs for firms with petroleum-based primary input. Many industries such as paints and packaging are beneficiaries. While we can expect companies from these sectors to retain part of the gains, the rest will get passed on downstream and help lower inflation.

As liquidity dries, time for fundamentals

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(Any opinions expressed here are those of the author and not of Thomson Reuters)

The focus is back where it should be for equity investors – fundamentals.

In the past few years,  markets around the world have swayed to the wave of liquidity unleashed by central banks in a bid to get their economies back on track. The U.S. Federal Reserve, for one, was buying as much as $85 billion of bonds a month since September 2012. But that tap is beginning to taper with the Fed reducing purchases by $10 billion in January and another $10 billion in February.

We feel that this, together with a host of factors at home, sets the stage for a more sanguine approach to equities. I indicated in my note last month that we expect 2014 to be a year of fragile recovery for the Indian economy. The scenario will be similar for Indian equities.

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