While Deustche Bank doesn't expect the Reserve Bank of India to loosen monetary policy at meetings next week and end-October, an earlier-than-anticipated attempt to address fiscal consolidation raises the possibility of an earlier action. This includes a much-needed fuel price increase to lower the subsidy burden. "Energy has been the 'bete noire' for India's policymakers and investors," a note says, adding that rising deficits and policy inaction has resulted in fears of a sovereign rating downgrade. For every 10% decline in oil prices, India's fiscal deficit would narrow by 0.28% of GDP, and current account deficit would ease by 0.16%, it estimates. Also, until visibility over China's economic outlook becomes clearer, the impact of any monetary accommodation (by the ECB and likely by the Fed) may not see a runaway increase in global energy prices.
"Expectations of muted energy prices are a strong positive for India," and its "attractiveness in relative terms within the emerging markets universe - despite its internal issues - should improve considerably."
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