Thursday, November 6, 2014

Why India's stockmarket run will continue

Lower oil prices is one reason:

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But one group of countries gains unambiguously: those most dependent on agriculture. Agriculture is more energy-intensive than manufacturing. Energy is the main input into fertilisers, and in many countries farmers use huge amounts of electricity to pump water from aquifers far below, or depleted rivers far away.

A dollar of farm output takes four or five times as much energy to produce as a dollar of manufactured goods, says John Baffes of the World Bank. Farmers benefit from cheaper oil. And since most of the world's farmers are poor, cheaper oil is, on balance, good for poor countries.
Take India, home to about a third of the world's population living on under $1.25 a day. Cheaper oil is a threefold boon. First, as in China, imports become cheaper relative to exports. Oil accounts for about a third of India's imports, but its exports are diverse (everything from food to computing services), so they are not seeing across-the-board price declines.

 Second, cheaper energy moderates inflation, which has already fallen from over 10% in early 2013 to 6.5%, bringing it within the central bank's informal target range. This should lead to lower interest rates, boosting investment.

Third, cheaper oil cuts India's budget deficit, now 4.5% of GDP, by reducing fuel and fertiliser subsidies. These are huge: along with food subsidies, the total is 2.5 trillion rupees ($41 billion) in the year ending March 2015--14% of public spending and 2.5% of GDP. The government controls the price of diesel and compensates sellers for their losses.

Lower interest rates from the Indian central bank are coming:


Finance Minister Arun Jaitley favours a cut in interest rates to trigger demand in the construction sector, a newspaper report said on Saturday, but the Reserve Bank of India (RBI) has signalled it will not ease policy until it is confident of lower inflation.

In May, Prime Minister Modi was elected on promises that his government would create jobs and rejuvenate the economy, but experts were disappointed by Jaitley's first budget and a lack of early progress on fixing structural economic problems.

"Currently, interest rates are a disincentive. Now that inflation seems to be stabilising somewhat, the time seems to have come to moderate the interest rates," Jaitley said in an interview with the Times of India.

If oil stays down or moves lower than I think the RBI cuts rates and that will benefit the stock market in India. I have been bullish on India and remain so and I have been playing through the Mathews India Fund which is up almost 50% since I recommended it back before the election of Modi.





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