Brent crude crossed $90 a barrel after November last year, after the OPEC+ alliance extended production cuts for another three months. It’s still close to that point.
India is the world’s third-largest crude oil buyer and high-cost imports could widen the current account deficit and slow the economy. But there are factors dampening the economy.
Deepanvita Majumdar, economist at Bank of Baroda, said India imports more than 80% of its total oil needs, which will affect the current account deficit and the rupee. In the current financial year up to July, inbound oil exports stood at $55 billion, and with the domestic recovery underway, this level of dependence is likely to continue, he said.
„We estimate that for every 10% rise in oil prices on a permanent basis from a base of $80-85 per barrel, oil imports will increase by $15 billion or 0.4% of GDP,” Majumdar said. This would be reflected in a higher current account deficit, adding pressure on the rupee, he said.
Gaura Sen Gupta said that if crude oil prices average $90 per barrel for the rest of the fiscal year, CAD could rise to 1.9% of GDP against an estimate of 1.8%, while Indian crude oil will average $85 a barrel for the rest of FY24. , India Economist at IDFC First Bank.
„If crude oil prices sustain at $90 per barrel, we see limited upside risk to our valuation,” Sen Gupta said. However, a further upside risk lingers from the possibility of a major stimulus announced by China, which could support commodity prices, he said.
In the near term, dollar strength is expected to continue, supported by the US growth slowdown, helping higher Treasury yields, Sen Gupta said. Sen Gupta said the rise in crude oil would add to depreciation pressures on net oil import currencies like the rupee.
A lot depends on the RBI’s forex intervention, which aims to control volatility on both sides (valuation and depreciation). The dollar-rupee pair is expected to remain in the range of 82-84 till December, he said.
Majumdar said domestic retail pump prices are unlikely to change much if the oil price shock is not sustained while food prices are raised. The government can fix the remaining gap by shifting duties, which may have some financial implications, he said.
Despite volatility in crude oil, Sen Gupta also said inflationary risks from rising oil are unlikely as domestic petrol and diesel prices have not been hiked since May 2022. „Assuming domestic retail petrol and diesel prices remain unchanged till March 2024, we expect CPI inflation to average 5.8% in FY24.”
Petrol and related products have a weight of 2.4% in the CPI basket.
The direct impact of a 10% increase in crude oil is 15 basis points on the CPI, Majumdar said. „The indirect impact of this pass-through could risk an upside of 25-35 basis points to our baseline forecast of 5.5% for CPI in the current fiscal year.”
Sen Gupta estimated that the recently announced price of Rs 200 per LPG cylinder will moderate inflationary pressure by 20 to 30 basis points in September.
However, in the WPI basket, the impact is higher as crude-related products have a weight of 7.3%. Hence, a 10% increase from the current level could risk about 100 basis points to the upside, says Majumdar.
Higher crude oil prices reduce GDP growth by increasing the drag on net imports. A sustained increase in oil prices around $10 a barrel tends to reduce GDP growth by about 20 basis points, said Theresa John, economist at Nirmal Bank Institutional Equities.
However, the current high in crude oil prices is unlikely to last long as it is driven by supply cuts rather than high demand, he said. John does not expect India’s macro fundamentals to pose a major risk unless high crude oil persists.