India Has the Look, and Buzz, of a Red-Hot Market on Oil

You could excuse investors in India for sounding a little giddy these days. They’re just real excited about the tumble in oil prices.

“Crude oil has given such a beautiful boost,” S. Naren, chief investment officer at ICICI Prudential Asset Management, which oversees $22 billion, said in an interview on Tuesday in Mumbai. “Everyone knows India is the economy to bet on.”

For the oil-importing nation, the 55 percent drop in Brent since June to below $50 a barrel is a gift that Naren says could give Prime Minister Narendra Modi the room needed to step up infrastructure spending as he prepares the 2015 budget. He estimates the drop in crude is saving India $5 billion a month. The International Monetary Fund added to the euphoria earlier this week, helping drive the benchmark S&P BSE Sensex to a record for a third day today, by forecasting India will become the world’s fastest-growing major economy by March 2017.

The $1.7 trillion stock market has surged 36 percent during the past 12 months, the second-biggest advance among major markets after China. Brazil’s benchmark Ibovespa gauge slipped 0.2 percent as plunging commodity prices threatened the nation’s trade surplus, while Russia’s dollar-denominated RTS Index sank 44 percent amid a currency crisis triggered by the conflict in Ukraine.

Foreign investors are piling into India.

They bought $16.2 billion of the nation’s equities in the past 12 months, the most among eight Asian markets tracked by Bloomberg after Japan. Investors have added $2 billion to their holdings of local debt since Jan. 1, after plowing a record $26 billion into government and corporate bonds last year, according to exchange data.

‘Massive Boon’

“Oil’s crash is correcting our fiscal and current account deficits, and taking care of the inflation problem, which the Reserve Bank of India has been fighting for years,” Sampath Reddy, chief investment officer at Bajaj Allianz Life Insurance Co., which manages $6.8 billion, said in a phone interview from Pune, near Mumbai, on Wednesday. “The fall is a massive boon.”

The Sensex may rally 20 percent this year as falling commodity prices slow inflation and allow the central bank to follow up on last week’s unscheduled cut in interest rates, Reddy said. He estimates policy makers will lower the benchmark rate another full percentage point by year-end, bringing it to 6.75 percent. The Sensex rose 0.4 percent to a record 29,006.02 at the close in Mumbai.

There are risks, of course, to India’s economic boom.

Cost Savings

As easily as oil fell to under $50, it can surge right back higher. Government officials can’t be complacent, said Phani Sekhar, a fund manager at Karvy Stock Broking Ltd. in Mumbai. They need to use the savings from oil’s decline to build roads, ports and power plants, helping lay the groundwork for a sustained economic expansion, according to Sekhar.

For now, crude prices near a 5 1/2-year low are improving India’s finances. Data last week showed the trade gap narrowed to the smallest in 10 months in December. Retail inflation will probably be below the January 2016 target of 6 percent set by the RBI last year, Governor Raghuram Rajan said Jan. 15 when he cut the benchmark rate for the first time since May 2013.

The positive impact of slowing consumer-price growth sets India apart from many developed economies, where central banks are more concerned about the prospect of deflation.

“The combination of lower interest rates and a better fiscal situation because of falling oil makes India very attractive,” ICICI’s Naren said. “With oil at $50, there’s no other emerging market that is as attractive.”

Parliamentary Approval

While the IMF reduced its estimate for developing-market growth this year to 4.3 percent from 5 percent in October, the Washington-based lender predicts the pace of the expansion in India will rebound back up to 6.5 percent in the year through March 2017.

The Sensex jumped 30 percent last year on Modi’s pledge to revive growth from near the lowest level in a decade.

In the eight months since he took office, though, Modi has struggled to win approval from lawmakers in the upper house of parliament for proposals aimed at attracting investment in insurance and coal mining. That’s prompted him to use temporary orders to push through policy changes. Parliament will next consider the measures in the budget session in late February, offering Modi another chance to enact permanent reforms.

“It’s more important for the ordinances to be converted to law in the budget session rather than big announcements on the budget day,” said Naren at ICICI Prudential. “That would be transformational.”

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