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Why Oil’s Fall Couldn’t Have Come at a Better Time for Modi

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Dec. 10 2018, Updated 9:55 a.m. ET

Oil’s fall

India (INDA) ranks among the world’s major oil importers. The country runs a big crude oil import bill, which, coupled with its massive trade deficit with China (FXI), has been a consistent drag on its current account.

India’s currency also came under pressure this year amid concerns about the country’s burgeoning trade deficit. While a weaker currency helps India’s software companies such as Infosys (INFY), it also leads to higher costs for imported goods.

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The fall in oil prices in 2015 helped the Indian government raise taxes on petrol and diesel. Higher taxes helped India channel more money toward the infrastructure sector, which badly needed funds. As oil prices rose sharply this year, concerns emerged about fiscal slippage, and the Indian government had to lower taxes on energy products, fearing electoral losses resulting from angst about higher petrol and diesel prices.

Inflation concerns

Currently, crude oil prices have fallen sharply, and the Indian rupee has also recovered from its 2018 lows. A combination of these two factors could help tame inflation concerns. India’s (INDA) central bank kept key rates unchanged in last week’s meeting.

Furthermore, lower crude oil prices could help Indian Prime Minister Narendra Modi maintain or possibly increase spending on the social and infrastructure sectors. We could also see more populist measures from the Indian government as the 2019 elections near. However, populism could come at the cost of fiscal slippage or financial engineering—as was seen last year with the sale of Hindustan Petroleum Corporation to Oil and Natural Gas Corporation.

In the next article, we’ll see how analysts are rating ICICI Bank (IBN) and HDFC Bank (HDB).

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