OVER TO BUDGET

Besides, the budget will also lay out a plan on how the government will be managing its finances. In addition to being keenly watched by the rating agencies, this will also be keenly watched from the Mint street, Mumbai. As we have seen in the bi-monthly Monetary Policy review, held on February 3, RBI has kept its policy rates unchanged after some easing of the monetary policy on January 15. Although, RBI Governor Raghuram Rajan has not given any guidance for the next monetary policy, he has insisted that upcoming data points like GDP numbers, inflation and Union Budget will remain a key to future rate actions. Hence the ball is now in the Government’s court and how they play it will determine the way economic activity gathers pace from hereon.

The rise in the crude oil prices in last one week may make the government’s job a little tricky. India’s key economic variables are inversely related to crude oil prices as India has one of the highest oil import share vis a vis its total imports in the world. Currently, almost one third of India’s total import is constituted by crude oil. The oil import bill in last ten years has gone up by six fold, and has remained one of the key reasons for derailing the government finances. The recent drop in the crude oil price, according to my assessment, is more due to the use of the commodities as financial product post 2000. Therefore, there are factors other than demand and supply which plays a dominant role in determining the price of a commodity. In mid of last year we saw all the television channels, newspapers and other medias filled with reports of disturbances in Middle East, especially in Libya and Iraq. This along with tension in Russia with Ukraine has prompted financial investors to build long positions in crude oil. Nonetheless, supply from these so-called disturbed areas did not show any mark decline. This led to cutting of the net long positions in oil futures by almost 60 per cent by September that resulted into sharp decline in the crude oil prices. Financial markets overestimated the challenges of oil supply earlier and perhaps are underestimating the demand of crude oil now. Whatever may be the reasons for the fall or rise in the crude oil prices, the current low price presents an excellent opportunity for Indian government to lock in the lower prices by using the future market. India currently imports nearly 2.7 million barrels of crude oil and related products per day. Also, on an average, the daily volume for Light Sweet Crude Oil futures has been 693,007 contracts with each contract having size of 1000 barrels. This volume is for one-month contract. However, contracts for nine years are also available. . The finance ministry should exploit this option to protect itself from the vagaries of crude oil price fluctuations. This will help the government to prevent its budget estimations going haywire owing to future crude oil price movements.

In this issue our cover story deciphers the various factors that will determine the future movement of the equity market and how it’s going to pan out during the next one year. Our special report on railway budget talks about how different companies in this sector are going to get benefited. This issue also has a special report on US President Mr Obama’s visit to India and how this will pave the way for many strategic partnerships in varied areas.

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