‘Crude’ impact on economy: Every $10 rise in Brent widens India’s CAD by 0.5%

The economic impact of global oil supply have important implications for India – a net importer of crude oil – to deliver price stability. Moreover, the oil supply-related news shocks cause a sustained increase in consumer prices, impact the value of Indian currency and reduce the domestic output.

High crude oil prices are said to have a domino effect on the economy, as the price shocks are instantly passed on to the macroeconomic indicators. According to latest estimates by market analysts, India’s current account deficit (CAD) -which measures the difference between exports and imports of goods and services – is also impacted by high crude prices. 

CAD is a key indicator of the balance of payment of a country and in the current scenario of the momentum picked up by crude rates, every $10 dollar rise in Brent futures potentially widens the CAD by 0.5 per cent. 

“Rising crude prices positively impact oil exporters and negatively impact oil importing countries like India. Every 10 dollar rise in Brent crude prices widens India’s current account deficit by 0.5 per cent. Consequently this depreciates the INR and leads to imported inflation,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

According to the last government data on CAD, the deficit in the January-March quarter of FY23 narrowed to $1.3 billion, accounting for 0.2 per cent of the country’s gross domestic product (GDP), according to the Reserve Bank of India (RBI). India Ratings has estimated that the CAD in the April-June quarter of ongoing fiscal will narrow down to $10 billion or 1 per cent of GDP.

Also Read: From high inflation to import bill – the domino effect of rising crude oil prices on Indian economy

High crude price impact on Indian economy

India fulfills as much as 85 per cent of its energy needs through imports, may see a heavier import bill if international crude oil prices keep rising throughout the year. High oil prices pushes the US dollar above against its peers, which in turn, is a downside for the Indian rupee. A stronger dollar can weigh on oil demand by making the fuel more expensive for holders of other currencies.

‘’The sharp increase in crude oil prices has disrupted India’s balance of trade, making it more vulnerable as a net oil importer. This heavy reliance on oil imports has driven up energy costs, putting pressure on the stability of the Indian rupee. As the rupee weakens and import expenses rise, inflation is on the rise, posing a significant challenge to India’s economic growth,” said Arvinder Singh Nanda, Senior Vice President, Master Capital Services Ltd.

‘’The combination of higher living costs and a depreciating currency is discouraging both domestic and foreign investments,” added Nanda.

Also, oil marketing companies (OMCs) including Indian Oil, Bharat Petroleum Corp Ltd (BPCL) and Hindustan Petroleum Corp Ltd (HPCL) may be forced to lift the freeze on petrol and diesel prices on rising international crude prices.

OMCs did not significantly increase the retail prices last year even after crude reached a peak of $140 per barrel in March 2022. Due to this, the oil refiners registered losses as petrol and diesel rates have been unchanged since April 2022. However, the central government can force OMCs to cut petrol and diesel prices around Diwali as state elections begin in November and also because their balance sheets have largely got repaired due to stronger profits in the first quarter of current fiscal.

The stock prices of OMCs also witness a significant decline on surging crude prices, which in turn, is a negative indicator for the stock market – despite the current bullish momentum.

‘’Rising crude prices impact the profit margins of companies that use oil as input. So, the impact on the stock market will be negative. But now in India the markets are ignoring the rising crude prices. The reason is that the positive impact of good GDP growth, decent corporate earnings and sustained fund flows to the market is neutralising the negative impact of rising crude. The situation might change if Brent crude rises to $100,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Also Read: OMCs incur losses on petrol, diesel sales as Brent rises to $91/bbl; Kotak cuts Q2 growth outlook for IOC, HPCL, BPCL

Where are crude oil prices sitting now?

Oil prices hit a 10-month high on Friday, September 15, and posted a third weekly gain as supply tightness spearheaded by Saudi Arabian production cuts combined with optimism around Chinese demand to lift crude.

Brent crude futures rose 23 cents, or 0.3 per cent, to settle at $93.93 a barrel, while U.S. West Texas Intermediate futures was up 61 cents, or 0.7 per cent, to close at $90.77 a barrel. Both contracts traded at 10-month highs on Tuesday for the fifth consecutive session, and gained about 4 per cent on a weekly basis. 

Brent futures rose to a 10-month high as $94.63 in the session, their highest since November 2022. Oil prices are also on track for their biggest quarterly increase since Russia’s invasion of Ukraine in the first quarter of 2022, according to news agency Reuters.

Earlier this month, oil producers Saudi Arabia and Russia extended their voluntary oil output cuts of a combined 1.3 million barrels per day (bpd) to the end of December 2023. These are on top of the April cuts agreed by the Organisation of Petroleum Exporting Countries and its allies (OPEC+) running to the end of 2024. Investors had estimated Saudi Arabia and Russia to extend voluntary cuts into October, but the three-month extension was unexpected.

Updated: 16 Sep 2023, 11:13 PM IST