Current Economic Scenario – Part III
Last two blogs talked about the current situation of Indian Economy, here we will be talking about what happens if one of the Components of our economy changes.
*This scenario is very unlikely looking at the current situation and policy actions.
-Change in Crude Oil Prices
A further decrease in crude oil prices would be the most fortunate thing that could happen to revive the economy. This would mean that the supply side pressures get eased automatically reducing the inflation rate (disinflation) and thereby also increasing the demand for other industrial products and reviving the GDP growth rate marginally.
Investment opportunities if the Oil Prices Reduce:
An increase in crude oil prices with no change in currency exchange rate would be an economic disaster for the country, creating an upward inflationary spiral and reducing GDP to a great extent i.e. a situation of severe stagflation. It is very important for the Economic Bodies to react before any of these happen as a key to this problem has not been found till now and could lead to a severe depression.
Last two blogs talked about the current situation of Indian Economy, here we will be talking about what happens if one of the Components of our economy changes.
- Appreciation/Depreciation of rupee and its effects
This suggests that the most favorable scenario for the economy would be of Rupee Appreciation. Here, it is important to note that in an ideal scenario (Good GDP Growth rate, controlled inflation measures) Foreign Domestic Investment i.e. Foreign Investment in India increases with the weakening of rupee (more rupee for 1$) but in current scenario it is very important to infuse confidence into the Foreigners regarding Indian Economy.
Let’s say if You and I have got 1 billion dollars to invest than a rupee conversion rate would not matter as much as a prospective return on our investment which is indicated by a good GDP growth rate.
Investment opportunities if the Rupee appreciates:-
- Buy Govt. bonds as the yields will most likely decrease (due to decreasing inflation), increasing the Bond’s price.
- Buy the stocks of cyclical industries (industry which do well in good economic times). Example: Auto industry, Infrastructure industries, Luxury Goods industry, etc.
Investment opportunities if the Rupee depreciates:-
- Buy stocks of non-cyclical industry like staple goods, agriculture, etc. as the demand for these goods will increase with the ever-rising population.
*This scenario is very unlikely looking at the current situation and policy actions.
-Change in Crude Oil Prices
A further decrease in crude oil prices would be the most fortunate thing that could happen to revive the economy. This would mean that the supply side pressures get eased automatically reducing the inflation rate (disinflation) and thereby also increasing the demand for other industrial products and reviving the GDP growth rate marginally.
Investment opportunities if the Oil Prices Reduce:
- Buy Govt. bonds as reduced inflation would mean a decrease in require yields and an increase in bond prices.
- Buy stocks of non-cyclical industries as only a reduction in oil prices with other scenario unchanged is not supposed to revive the economy substantially.
An increase in crude oil prices with no change in currency exchange rate would be an economic disaster for the country, creating an upward inflationary spiral and reducing GDP to a great extent i.e. a situation of severe stagflation. It is very important for the Economic Bodies to react before any of these happen as a key to this problem has not been found till now and could lead to a severe depression.
Ravi,In past one year,crude and INR-USD followed opposite movements.In March,2012 when USD was at low of 49INR, crude was at top of $112.In June when USD reached high of 56-57 crude was trading at $80.both this instances nullified each other to some extent.It is important how both of this behaves in future to decrease net import for India.
ReplyDeleteYes thats very much true and I have mentioned it in my previous blog that how the fall in crude prices did not benefit India in the recent past. And yes, crude is a major component of India's import but looking at the recent developments where the First World Countries have found new Oil Fields it is highly probable that crude oil prices will not increase significantly in long term (P.S also consider in technological innovation) and as far as dollar is concerned, well the next one year will probably give us all the answers though the short term has been good. (Rupee has appreciated almost 273paise against dollar in last 14days)
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