How India can gain from falling crude, gold & coal prices

“If global oil prices sustain at current levels, we estimate oil subsidies to fall by 44 percent YoY in FY1 - the sharpest fall in any one year since FY10 - and by a further 42 percent in FY16,” the report added. On the back of falling subsidies, ONGC and OIL are expected to gain too as they fund about 40 percent of the subsidies.

Earlier in the day, Reserve Bank governor Raghuram Rajan too made a pitch for eliminating diesel price subsidies completely.

Along with OMCs, falling crude prices will also provide a much-needed impetus in terms of demand for entry-level cars. Buyers in this segment have been most impacted by high gasoline prices, inflation and interest rates over the past three years. Maruti perhaps will be the key beneficiary of a recovery in entry level cars as it has a 74 market share in this segment, says the DB report.

Banking on crude prices sustaining at current levels, DB expects lower inflation expectations driving mark-to-market gains on bond portfolios of PSU banks. It expects SBI, PNB, BOB, LIC Housing Finance, REC and PFC to be the key beneficiaries. Increasing liquidity can also result in pushing down wholesale funding costs, thus benefiting wholesale borrowers such as NBFCs.

Not just PSU banks, Rajan at a Press Conference on Monday said bond issuances in the corporate sector too has risen.

But the big question now is can India handle an earlier-than-anticipated normalization of US monetary policy? Deutsche Bank believes sharp improvement in India’s external vulnerability indicators, a highly credible RBI and government focused on economic growth and importantly an environment of softer global commodity prices should help India differentiate itself from many of its EM peers.

Also, as pointed out by governor Rajan himself, one of the biggest factors that differentiates India from the rest of the emerging markets pack is the fact that it now has a stable government.

However, Rajan had earlier pointed out that an abrupt reversal of low interest rates globally could create huge amounts of damage and that it should be done in a predictable and careful way. "We're in the hole we are in. To reverse it by changing abruptly would create substantial amounts of damage. So I'm with (US Federal Reserve) officials in saying that as we get out of this, let's get out of this in a predictable and careful way, rather than in one go," he told Time magazine.

Fading glitter of gold can boost savings

The fading glitter of gold can be seen from the sharp dip in the investment component (mainly coins and bars) of gold demand which has now dipped to 23 percent of total gold demand in Q4FY14 versus 42 percent in Q3FY13.

The declining lure of gold has the potential to trigger a much needed shift away from physical savings to financial savings through bank deposits, mutual funds, insurance, etc, the DB report says.

Can RBI turn dovish?

Recent improvement in monsoon, sustenance of crude prices around multi-period low levels and easy liquidity scenario may push the Reserve Bank to adopt a more dovish stance on interest rates than earlier anticipated, says the DB report.

However, Rajan today sounded caution on the back of the weak IIP and CPI number which came out on Friday. But on the brighter side, he said India is on recovery course.

Is the decline in global oil prices sustainable?

According to Deutsche Bank’s oil and gas analysts, Harshad Katkar and Amit Murarka, decelerating global oil demand (International Energy Agency has downgraded demand estimates from 1.3 mmbpd in January 2014 to 0.9 mmbpd currently) strengthens the case for a sustainably lower oil price. Bloomberg Finance LP data indicates refinery capacity maintenance shutdowns to rise in September-October by more than 1 mmbpd compared to August 2014 – further reducing demand for crude oil in the near term.

In an interview to CNBC-TV18 on Friday, Fadel Gheit, managing director and senior analyst at Oppenheimer & Co had said that crude oil prices cannot be trading much above their replacement cost. They have been inflated for quite some time, because risk premium due to fear of potential supply disruption has increased. Gheit says crude prices can fall to USD 90 per barrel or even below by December.

“I am very confident that the US will end up lifting the ban on oil exports and that will bring crude oil prices lower, at maybe USD 10 lower from current level,” Gheit says. He even said oil prices above USD 70/barrel are not sustainable in the long term.

Vandana Hari, Editorial Director - Asia, Platts too sees sustained bearishness in global crude oil prices. She says the fundamental demand-supply story – supply glut and low demand – points to downward pressure on prices. She does not see oil prices racing back to USD 100 anytime soon.

Hari says supply from non-OPEC – part of the world that is not affected by the Middle-Eastern crisis – particularly the United States, is more than enough to handle current and projected demand from the world over.

(Posted by: Devika Ghosh)