The mood of India's political and economic elite had darkened in recent months. Not only had growth slowed, but inflation was also not coming down. A sharp increase in the country's fiscal deficit and a yawning current accounts deficit had raised fears that India could be roiled by capital flight or even a balance of payment crisis.
However, some of these fears are subsiding now. The recent fall in the commodity prices may have come as a blessing in disguise for the Indian economy. A sharp fall in crude oil prices and crash-like situation in several other global commodity prices, mainly gold and other metals, have reversed the mood of gloom in India.
India is a peculiar country. Rather than riding on the commodity boom, its economic growth rides also on the bust. The positives of the commodity softening will work on manifold. First, it will bring down drastically the country's imports bill which is largely driven by crude oil and gold. The changing global situation coupled with already low demand in several industrial and consumer goods will bring down inflation. Thus making the Reserve Bank of India (RBI) cut the policy interest rates rather significantly.
The spin-off will be revival in consumer demand and reduction in the cost of production for the corporates, which will in turn lead to higher earnings. Thus, the cyclical factors will turn positives. The impact on improved earnings will be seen from the second quarter of the current fiscal.
As a result, deep-pocketed foreign funds are trooping back into Indian stock markets in the wake of expectations that Asia's third largest economy may have bottomed out and a recovery would revive investment, boost corporate earnings and ensure higher returns to investors.
The BSE-Sensex has risen more than 6% in two weeks and may continue the momentum with the weather department forecasting a normal monsoon this year. Bountiful rains, is crucial for all crops in the nation of more than 1.2 bn people. It will increase rural incomes which will lead to spending on a wide range of consumer durables.