High oil price significant risk to the Indian economy, says Moody’s

A majority of Indian and foreign investors consider high oil prices a key risk to the economy, Moody’s Investors Service said on Wednesday.

The US rating agency’s report is based on a survey of 175 respondents, including more than 100 financial institutions, at the annual India Credit Conference in Mumbai and Singapore held in June.

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In its report, Moody’s said: “Similarly to the views of the poll respondents, we also consider higher oil prices to be a risk to growth, but risks to sovereign credit dynamics from oil has diminished in recent years following subsidy reforms to petroleum and diesel fuel; only liquefied petroleum gas and kerosene oil remain subsidised.’’

The rating agency said it does not expect oil prices to remain elevated for an extended period, but this possibility “remains a downside risk’’. Prices of Indian basket of crude surged from $66 a barrel in April to around $75 a barrel at present.

Investors also felt that there are risks to achieving 3.3 per cent fiscal deficit. However, the agency said that  “Although, we expect the recapitalisation package to be sufficient to meet the minimum regulatory capital needs, it will be insufficient to support credit growth.’’

“Banks have not been able to raise new capital from the equity markets as planned under the government’s recapitalisation measures,” it added.

Poll participants favoured consolidation of five-to-10 public sector banks from 27 currently, in line with more recent government announcements.

In October last year, the government had unveiled a Rs 2.11 lakh crore PSU Bank recapitalisation plan. Of this, Rs 1.35 lakh crore is to come from the sale of recapitalisation bonds. The remaining Rs 76,000 crore will be through budgetary allocation and raising of funds by banks from the markets.

Investors had also identified top risk with regard to financing conditions and telecom sector competition.

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