Are global commodities signalling anything to the equity markets? The sharp slump in oil and other commodities over the recent weeks has been like a wake up call for global markets. But, it remains to be seen how equity investors react to this fall.
To commodity importing nations like India, this is a huge positive as our budgetary numbers are based on oil at $75. If we can buy oil at significantly lower prices for the rest of the year, it gives our government far higher room to spend, do more Capex, and maintain the growth momentum. The government can also go in for tax cuts, lower fuel prices, reduce inflation and create more headroom for lowering interest rates.
All these could significantly help the government maintain the GDP growth momentum above 7%. This is very essential for our country given the already prevailing levels of unemployment, rural stress and falling domestic savings. In that sense, our government could not have asked for more, and lower commodity prices have been a godsend. But, will the government act quick and fast in passing on benefits of lower oil prices? That is something we should see in the coming week itself, as the political process of state elections are set to begin and the window to do that is extremely short.
Lower fuel prices will also help revive the sentiment in domestic auto sales especially in the four wheeler segment. A lot of heavy lifting can be done by the government using the softening oil prices. This should set the stage for lowering interest rates and improving the consumer sentiment in the economy. How the government uses these levers will be critical as time lost now can affect the trajectory of GDP growth going forward. We are poised at a very interesting stage and our economy can be an outlier among peers if we get all our macro moves right and utilise the lower commodity prices to improve our global competitiveness as well as to scale up our capital expenditure. The time to be decisive is now.