Home / Markets / Commodities /  India may dodge recession bullet

NEW DELHI : India may be better placed than many other economies to navigate a recession in the US and Europe as it would cool red-hot oil and commodity prices and help avert further interest rate hikes, fund managers and analysts said.

Recession fears, which have hammered equities earlier, have begun eroding commodities as well: prices of base metals such as copper, aluminium and zinc that shot to record levels after the outbreak of the Russia-Ukraine conflict have dropped significantly.

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Course correction

On Wednesday, crude prices traded at $113 a barrel but were lower than Monday’s $121.46 and could see a further correction.

In fact, in a 5 July report, analysts at Citi Research said that if a recession unfolds, oil prices may fall to $60 by the year-end.

Though a recession can be good news for none, the resultant cooling of prices could alleviate India’s concerns around the current account deficit and high import bills.

Megh Mody, a commodities and currencies analyst at Prabhudas Lilladher, said that the possibility of a recession remains real as long as the US Federal Reserve keeps raising interest rates.

During a recession, commodities falter after equities, and they have begun correcting, which will continue this year, said Mody, adding this will benefit Indian importers.

However, a global slowdown will adversely affect exports, too.

India is better placed to weather a slowdown, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities.

However, exports in certain sectors such as gems, jewellery and textile may see an impact. Further, the impact of a recession on other export-oriented countries such as Japan, Vietnam, and Korea will also impact other Asian economies and exports from these countries will also suffer.

The impact, however, will largely be on goods, followed by services in case of a prolonged slowdown.

It will probably be less than that seen during the global financial crisis, which had a significant contagion impact, Rakshit said.

The global risk-off sentiment is strengthening the dollar, and in the near term, the US currency may continue appreciating and move with an upward bias, he added.

Aishvarya Dadheech, a fund manager at Ambit Asset Management, said that the fear of structurally high inflation is receding due to the recent sharp decline in commodity prices, following recession fears in developed economies, a strong dollar index and rising interest rates.

Central banks may have to re-strategize their monetary policy normalization as inflation in all likelihood has peaked, Dadheech said, adding that too fast a hike in rates will backfire and may lead to a hard-landing of economic growth.

The respite on inflation can also help control interest rates.

With an “expected decline in inflation concerns, we can expect lower interest rate hikes which the markets have already started pricing", said Nishit Master, portfolio manager, Axis Securities.

However, the joker in the pack is the extent of the decline in inflation rate going ahead, along with the extent of demand destruction in case of recession and a corresponding increase in unemployment which will determine the rate trajectory, Master said.

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