Oil Below $100: Some Relief For The Indian Economy; More Needed
Easing prices of Brent crude is bringing some relief to the Indian economy, though the outlook remains uncertain.
Falling crude price could bring some short-term cheer for the government's fiscal management plan. But the outlook remains uncertain.
Brent crude has remained high through much of the ongoing fiscal, having soared after Russia's invasion of Ukraine. Now that it is showing signs of easing, it is also bringing some relief to the Indian economy.
Brent traded at an average of $104 a barrel in the first half of the ongoing fiscal year between April and September, an average of $94 in October and up to Nov. 20 this month, on the back of slowing global demand and a strengthening dollar.
Crude prices are now likely to remain below $100 a barrel as slowing global growth is likely to weigh on commodity prices, said Teresa John, economist at Nirmal Bang Institutional Equities.
Current Account Deficit
It certainly does help India in keeping the current account deficit and balance of payments under check, said Suvodeep Rakshit, senior economist at Kotak Institutional Equities. With every $10 per barrel reduction in the average crude price, the CAD/GDP would narrow by around 40 basis points, according to Rakshit's estimates.
"At around average price of $105/barrel in FY2023, we are expecting current account deficit at 3.9% of the GDP," he said.
Aditi Nayar, chief economist at ICRA Ltd., also expects a slight moderation in the current account deficit in the second half of the fiscal year relative to the first, on account of various factors including lower commodity and oil prices, and seasonally higher exports even as the slowing global economic scenario poses a risk.
To be sure, the rupee's depreciation against the dollar has offset some of the benefit from lower oil prices, said DK Joshi, chief economist at Crisil, who expects Brent to range between $90 and $95 a barrel in the second half of the fiscal.
A working paper by the Reserve Bank of India on the impact of crude shock on India’s current account deficit, inflation and fiscal deficit, estimates that with oil prices at $85 a barrel, the deficit on account of oil balloons to about 3.6% of India’s GDP.
As a rule of thumb, every $10/barrel increase in crude price will shoot up the CAD/GDP ratio by 43 basis points, according to the paper published in 2019.
CPI Inflation
Costlier global oil increases the domestic price of crude products and increases inflation. To be sure, a change in international price does not lead to an equal percentage change in pump prices. According to the RBI's rule of thumb, every 100 basis points increase in petrol price leads to 2.6 basis points increase in core CPI index and vice versa.
While pump prices have been stable, non-retail fuels have seen an adverse impact of costlier oil. If crude moves lower, fuel prices and, in turn, headline inflation trajectory will benefit out of it, Rakshit said. John said that lower oil prices are unlikely to impact inflation just as yet, with rates at the pump unlikely to be reduced immediately.
An Uncertain Outlook
Despite the easing, even at current rates, oil remains uncomfortably high, Joshi said. As a rule of thumb, oil at over $80 per barrel is a source of discomfort for India, he said. While commodities including oil are expected to ease, a complex geopolitical scenario makes it hard to determine levels going ahead, unless there is a collapse in the global economy instead of just a slowdown, he said. However, that is not he base case, he added.
In its latest Short-term Energy Outlook for November 2022, the US Energy Information Administration forecasts the average Brent crude oil spot price at $93 per barrel in the fourth quarter of 2022 and $95 per barrel in 2023.
The outlook is highly uncertain—potential supply disruptions and slower-than expected crude oil production could lead to higher oil prices, while the possibility of slower-than-forecast economic growth may contribute to lower prices.