NEW DELHI: India’s key macro indicators, such as CPI inflation, WPI inflation, and the trade and current account deficits are seen subdued in the near-term, given global commodity prices are low and unlikely to rise sharply in the coming months, say economists.
“The slowdown witnessed in the world economy has resulted in prices being low. In particular, China is a driver of prices and as long as growth is weak, prices will remain subdued,” said Madan Sabnavis, chief economist, Bank of Baroda.
“Also, notwithstanding the Hamas issue or Red sea attacks, crude prices have (been moderate) This has kept commodity prices subdued. My sense is that this will prevail in 2024 too,” he added.
In January, both CPI inflation and WPI eased to a three-month low of 5.1% and 0.27%, respectively. Core CPI inflation in fact moderated to a 50-month low of 3.6% and the merchandise trade-deficit, in value terms, came in at a nine-month low of $17.49 billion. Merchandise imports during January were at a six-month low of $54.41 billion and exports were at $36.92 billion as compared to $38.38 billion in December.
These three macros, published every month, are reflective of the immediate change in the movement of commodity prices. And since prices of key commodities, such as crude oil, metals, ores, minerals, and chemicals are subdued and lower than their previous year’s levels – CPI, WPI and trade deficit numbers are unlikely to rise up sharply in the next 3-4 months, say economists.
The Reuters CRB Index which captures a basket of commodities has fallen by 5.3% so far in the current financial year as compared to an increase of 29.2% in FY23 April- Feb till date, as supply chains have normalised, excess demand led pricing power has eased and the global economic growth has softened led mainly by China and Europe.
India’s manufactured goods inflation – an indicator of price movements of major industrial input items – as measured by the WPI, has remained deflationary since the past 11 consecutive months. In January, it was at (-)1.13%, the lowest in four months.
“Improved supply conditions as well moderating demand have weighed on prices of energy basket which also has had a second round impact on manufactured goods inflation,” said Garima Kapoor, senior vice president and economist, Elara Securities.
Since manufactured products remain in the deflationary zone, there is no immediate threat to core CPI inflation as well. The HSBC India Flash PMI data for February, released on Thursday, also showed moderation in price pressures at an aggregate level across India.
“Moreover, on the energy front, as Russia-Ukraine led disruption on supply of energy eased, the war premium has nearly disappeared leading to a collapse in crude and gas prices and their derivatives,” Kapoor noted, while adding that the global commodity prices are expected to remain on a “weaker footing” in the near to medium term, aiding continued moderation in inflation metrics.
In the first ten months of the current fiscal, the price of India’s crude oil basket has averaged $82.4 per barrel, much lower than $96 per barrel in the comparable period of FY23. Analysts expect India’s crude oil basket to average between $80-85 per barrel in the coming months as well.
Radhika Rao, senior economist, DBS Group Research said that in the year ahead, the direction of commodity prices will be determined by any escalation in geopolitical risks and/or global growth outlook, apart from sector-specific supply-demand dynamics. “Risks on both the exogenous drivers are subdued at this juncture, leaving commodity prices on a steady to softer trajectory, including oil, which has remained capped at $85 per barrel.”
Merchandise trade deficit has benefitted from lower commodity prices, which aided to softness in the import bill. Most economists expect India’s Current Account Deficit to be around 1-1.1% in FY24 and 1.2-1.3% in FY25, much lower than 2% print in FY23.
Source: The Financial Express