• Oil Prices to India’s Inflation Rate: Among emerging markets, India is known for stubbornly high inflation. At the beginning of 2014, the year-over-year change in India’s consumer price index was about 10%.9 As of the end of September, this measure was below 6.5%10 —a significant decrease. India imports more than 70% of the oil that it needs, and oil has a 9.5% weight in India’s CPI.11
Conclusion: A Lower Oil Price Helps India Manage Its Twin Deficits
While all of the relationships we’ve outlined between India and the price of Brent oil are certainly important, the most important could very well have to do with India’s “twin deficits.” India is known for having a significant current account deficit, which stems largely from its need to import oil. India also is known for having a particularly stubborn fiscal deficit, which stems largely from its need to subsidize fuel prices for its citizens.
A lower price of oil can mitigate both of these issues, thereby allowing Prime Minister Modi’s government greater flexibility to pursue other important reforms.
1Source for intro paragraph: Bloomberg, with data through 11/13/14.
2Source: Bloomberg; period measured is 12/31/13 to 11/13/14.
3Refers to MSCI Emerging Markets Index; performance measured from 12/31/13 to 11/13/14.
4Source: “India Analysis Report,” U.S. Energy Information Administration, 7/26/14.
5Source: Nidhi Verma, “India Ends Diesel Controls, Raises Gas Prices,” Reuters, 10/18/14.
6Source: Jyotivardhan Jaipuria, et al., “Falling Crude Prices = Good Days Ahead,” Bank of America Merrill Lynch, 10/20/14.
7Source: N. Madhavan, “Are Low Crude Oil Prices Here to Stay?” Forbes India, 11/3/14.
8Source: “The Future of the Indian Rupee Is Tied to Oil Imports,” Knowledge @ Wharton, 11/15/14.
9Source: Bloomberg, as of 12/31/13.
10Source: Bloomberg, as of 9/30/14.
11Source: “The Emerging Markets Weekly: Summer Smog,” Barclays, 7/17/14.
Important Risks Related to this Article
Investments focused in India are increasing the impact of events and developments associated with the region, which can adversely affect performance.
Investments in emerging, offshore or frontier markets are generally less liquid and less efficient than investments in developed markets and are subject to additional risks, such as risks of adverse governmental regulation and intervention or political developments.