NEW DELHI: India’s inflation may increase by 1% if commodity prices, including crude oil, continue to remain high, which can threaten to cut India’s GDP growth, a recent research note released by Nomura Holdings said.
If the current trend in prices of natural gas, crude, coal and electricity continue till December 2021, and increase by around 5% till March 2022, then the potential impact on consumer price inflation (CPI) would be around 1%, the Japanese financial holdings company said, suggesting that it may lower India’s GDP.
The report adds that crude oil prices may alone impact India’s inflation by 30 basis points (bps).
Brent crude prices have surged to $85 per barrel, while natural gas prices have increased by around 26% from August levels. Many experts predict the price to go up further to $90 per barell.
Talking of coal shortage, it said the crisis will be resolved in a few months, but may lower industrial activity and accentuate inflationary pressures.
Nomura has also downgraded Indian markets to neutral from overweight rating due to unfavourable risk-reward given high valuations, as a number of positives appear to be priced in, while headwinds are emerging.
“We now see an unfavourable risk-reward given valuations, as a number of positives appear to be priced in, whilst headwinds are emerging. We, thus, downgrade India to neutral in our regional allocation and will look for better entry points given our still-constructive medium-term view.”
It said India’s valuation appears “very stretched”. It highlighted that 77% of domestic stocks in the MSCI index are trading higher than the pre-pandemic or post-2018 average valuations.