Not long ago, people predicted a free fall in the Indian rupee after a sharp rally in international oil prices. They spoke of oil touching $100 per barrel and the rupee dropping to Rs 80 to the US dollar and beyond. But, oil prices have retreated in no time to below $60 a barrel and the rupee was trading higher than Rs 70 to the US dollar as of last week.
If this quick movement happened over a period of months, it would not surprise people. However, within weeks is a bit tricky. One day markets surge due to a fall in oil prices. The next day, they fall on tensions between the US and China.
As an investor, you may think about a place to hide as financial markets constantly get bitten by the volatility, uncertainty, complexity and ambiguity (VUCA) bug. The reality is that these factors are a norm rather than an exception. Expect this to continue in 2019.
With general elections in May 2019, VUCA will be a permanent theme in financial markets. Institutional investors have resources to deal with this. They arm themselves with knowledge and that gives them an edge in an increasingly uncertain world.
Individuals cannot easily get hold of this information. However, they can make an effort to understand and learn.
One way of doing that is to follow public statements made by the Reserve Bank of India on economic prospects ahead. This column has already explained in the past the importance of RBI releases. The monetary policy committee of the RBI meets once in two months to set the credit policy. Their observations on key economic parameters like inflation, growth, and investment activity can give you a sense of direction. The assessment is based on multiple surveys RBI conducts regularly among economists, consumers and businesses. It also looks at the data put out by the government on growth, budgetary management and trade.
In the past, the RBI governor had discretionary powers to set the course of the monetary policy or fix borrowing rates. Now, a committee of experts works with the governor to determine the direction of policy every two months.
This gives a significant credibility to the process. For individuals, it may be a good idea to look up RBI’s assessment every two months to understand the latest situation across financial markets.
The committee, in a release last week, said that escalating trade tensions, tightening of global financial conditions, and slowing down of global demand pose downside risks to India’s economy. However, the committee sees the decline in oil prices as a tailwind for India’s economy. This is because every $10 change in oil prices affects India’s current account deficit (CAD) by 0.55 per cent and the consumer inflation rate by 0.15 per cent, according to analysts. Oil prices are down 25 per cent from the peak of $80 per barrel.
This means India’s CAD, or the money India owes the world in foreign exchange, could be lower in the second half of the current financial year. This is good news for the value of the rupee. At the same time, if the inflation rate is expected to remain low, then there will be no reason for the RBI monetary policy committee to consider a hike in borrowing rates.
The Committee has cautioned the government though, noting that fiscal discipline is critical to creating space for and ‘crowd in’ private investment activity. This means the government should spend money cautiously and not go overboard on expenditure. The warning is due to general elections in the next six months. Typically, incumbent governments tend to announce plans for the poor before the election commission announces the schedule for conducting general elections. Once the schedule is announced, it is not possible for the government to make any announcements that could influence voters due to the code of conduct.
The RBI committee is simply saying that any move that results in low fuel prices or farm loan waivers ahead of elections could increase government borrowing. When this happens, there is less money available to lend to businesses. Banks have to accommodate the government expenditure requirement as a priority over private sector lending and this can potentially take away any benefit India could get from low international oil prices.
Watch the MPC
The monetary policy committee of the RBI meets once in two months to set the credit policy. Their observations on key economic parameters like inflation, growth, and investment activity can give retail investors a sense of direction, especially during high market volatility