The Hindu Business Line : The underbelly shows

Given the dramatic equity valuations, it is hardly surprising that the volatile movements on the stock market these past few weeks have tended to eclipse other aspects of the economy equally noteworthy. The most obvious one is the composition of cresting foreign exchange reserves that crossed the $250-billion mark in the first week of October. Data for the first quarter of the current fiscal show the trade deficit widened by just $5 billion compared to Q1 the previous year . Net Invisibles grew by $4 billion in the same period with a salutary effect on the Current Account Balance that remained more or less at the same level. Interestingly, net transfers or remittances and software exports were not bruised much by a rising rupee while remittances grew faster precisely because of the strong rupee. Thus the adverse impact of a strong rupee on software earnings is being offset by higher remittances.

But the most noteworthy aspect surely is the fall in the Wholesale Price Index to a five-year low of 3.07 per cent. With all its shortcomings, the WPI-based inflation rate provides some clue to the impact of policy on price movements. Clearly, the rising rupee, despite the fallout it may have on exports, has contributed in no small measure to a falling inflation rate. This has been achieved by cheaper import prices that have neatly offset robust domestic demand and high commodity prices to stabilise prices at lower levels. To that extent, the RBI’s monetary policy seems to have met its central concern but not without some critical help from the Petroleum Ministry. With oil prices rising globally to around $90 a barrel, domestic prices should have shot through the roof, a prospect even the RBI would have been unable to counter had it not been for a government keen to keep prices of petroleum products as low as possible just when the spectre of elections has appeared over the horizon.

No prizes for guessing that the public sector oil majors will bear the burden of “under-recoveries” all through the rest of the government’s tenure or else pray for global oil prices to ease up a bit. For the economy at large, the low inflation rate is good news because it should keep the investment climate balmy and welcoming. Someone, however, has to pay the price for dear oil that even a strong rupee cannot mitigate. For now it is the oil majors whose own investment plans will come unstuck under the weight of an oil price subsidy for the domestic economy. But for how long?

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