Rising food, crude prices may play spoilsport, says HSBC

MUMBAI: HSBC does not seem to quite agree with the optimism exuded on Indian economy by various sections of the market and policymakers. The comfort of low inflation may be short-lived, with crude and food prices set to rise further.

Speaking to the media, HSBC senior Asian economist Robert Prior-Wandesforde said the optimism is taken too high.

The risks of growth could disappoint the consensus forecast of 8.5%. Contrary to popular perception, the risks are more internal than external. There has been a significant monetary tightening. And it takes around 18 months to see the impact of a monetary measure on the real sector. Besides, there are infrastructural and regulatory concerns as well. Though entrepreneurial spirits are high in the country, they tend to go overseas.

There are concerns on inflation as well. The current inflation figures are suppressed, as 50% of the rise in oil prices is passed on to consumers. And the government is reluctant to do so because it is politically sensitive and elections are nearing.

Assuming there is a complete pass-through in crude oil prices, the inflation would be at least 1.5 percentage points high, said Mr Prior-Wandesforde. Besides, inflation risks are not only in oil, but also in food prices. According to group chief economist Stephan King, the concern on inflation globally is not only through emerging market flows, but also through rising food and oil prices.

Back in India, WPI inflation could move high and rise back to 5% by the middle of next year. But India is in a better position to cope up with the US economic slowdown. The group expects the dollar to stage an upturn towards the second and third quarter of next year. At the same time, valuations of large cap stocks in US bourses would turn cheaper, and thereby, making it more attractive than equities in emerging, according to HSBC global head of forex research David Bloom.