The falling gold and oil prices are likely to result in a significant reduction in the current
account deficit, which in turn would provide the RBI with greater headroom for policy easing,
experts have said.
According to a RBS report, “the impact on India’s current account deficit should be
significant, cumulatively amounting to 1.9 per cent of GDP” provided for the full year FY14
prices for both oil and gold remain at current levels and aggregate volume gold demand remains
stable.
“Prima facie, the reduction in the current account deficit should provide the RBI with greater
headroom for policy easing,” the report said. According to a Bank of America Merrill Lynch
report, the downtrend in commodities is clearly good for the economy and eases the tail risks
on the twin deficit to some extent.
A falling commodity price environment could trigger much faster RBI rate cuts than consensus,
the report said. In the last few days gold fell to Rs 26,350 per ten grams, its lowest level
since August 17, 2011. Crude oil prices also tumbled in Asia with Brent falling below USD 100
a barrel.
“We have increased our expectation of a RBI rate cut this fiscal to 100 bps vs our earlier
expectation of a 75 bps cuts following the decline in commodity prices globally,” Bank of
America Merrill Lynch report said. RBI, in its mid-quarter monetary policy review on March 18,
reduced the repo rate by 25 basis points from 7.75 to 7.50 per cent. Repo rate is the rate at
which banks borrow short-term funds from the central bank, while CRR is the portion of
deposits that banks have to keep with it.
RBI lowered key policy rates to help revive growth. India’s GDP growth in the third quarter of
2012-13 fiscal, mended March 31, was 4.5 per cent – weakest in 15 quarters.
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