In an unprecedented twist, international crude oil prices surge to a staggering 10-month high, driven by Saudi Arabia and Russia’s extension of voluntary output cuts amounting to 1.3 million barrels per day until year-end. The ramifications of this soaring oil market resonate profoundly within India, a significant net importer of crude oil, with far-reaching implications for price stability.
These surging oil prices unleash a cascading effect on the Indian economy, as the shocks propagate instantly through macroeconomic indicators. According to the latest analyses by market experts, every $10 increase in Brent crude prices amplifies India’s current account deficit (CAD) by 0.5%.
Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, elucidates, “Rising crude prices bear a dual-edged sword, positively affecting oil-exporting nations while adversely impacting oil-importing countries like India. A mere $10 surge in Brent crude prices widens India’s CAD by 0.5%, subsequently eroding the value of the Indian Rupee and ushering in imported inflation.”
The latest government data on CAD, according to the Reserve Bank of India (RBI), reveals a narrowing of the deficit in the January-March quarter of FY23 to $1.3 billion, constituting 0.2% of the nation’s GDP. India Ratings anticipates a further contraction of the CAD to $10 billion or 1% of GDP in the April-June quarter of the current fiscal year.
India’s dependence on oil imports for 85% of its energy requirements exposes it to an exacerbated import bill should international crude oil prices persistently rise throughout the year. These soaring oil prices exert upward pressure on the US dollar against other currencies, subsequently weakening the Indian Rupee and amplifying the cost of fuel for holders of alternative currencies.
Arvinder Singh Nanda, Senior Vice President at Master Capital Services Ltd, elucidates, “The sharp ascent in crude oil prices destabilizes India’s trade balance, rendering it more susceptible as a net oil importer. This heavy reliance on oil imports drives up energy expenditures, imperiling the stability of the Indian Rupee. As the Rupee depreciates and import costs surge, inflation becomes a formidable challenge to India’s economic growth.”
Furthermore, oil marketing companies (OMCs) like Indian Oil, Bharat Petroleum Corp Ltd (BPCL), and Hindustan Petroleum Corp Ltd (HPCL) may face the inevitable decision of unfreezing petrol and diesel prices due to the escalating international crude prices. Last year, OMCs refrained from significantly hiking retail prices even as crude oil reached $140 per barrel in March 2022, resulting in losses for the oil refiners. However, with the central government’s potential intervention, OMCs could be compelled to adjust petrol and diesel prices, especially as state elections commence in November, coupled with their improved balance sheets in the first quarter of the current fiscal year.
The stock prices of OMCs also bear the brunt of surging crude prices, constituting a negative indicator for the stock market. Dr. V K Vijayakumar highlights, “Rising crude prices dent the profit margins of companies reliant on oil as a primary input. Consequently, the stock market’s outlook remains pessimistic. Nevertheless, India’s markets currently appear resilient to rising crude prices, thanks to the positive effects of robust GDP growth, healthy corporate earnings, and sustained fund inflows. The equilibrium might be disrupted if Brent crude surpasses the $100 mark.”
As of the latest data, oil prices soared to a 10-month peak on September 15th, with Brent crude futures settling at $93.93 per barrel, and U.S. West Texas Intermediate futures concluding at $90.77 per barrel. These figures reflect a 10-month high, with a weekly gain of about 4%. Brent futures even touched a peak of $94.63 in that session, the highest since November 2022. Notably, these oil prices are on track for their most substantial quarterly increase since the first quarter of 2022, coinciding with Russia’s invasion of Ukraine.
The extension of voluntary oil output cuts by Saudi Arabia and Russia has only added to the supply crunch, with these cuts stretching until December 2023. This is in addition to the April cuts agreed upon by the Organisation of Petroleum Exporting Countries and its allies (OPEC+), extending until the end of 2024. These developments took investors by surprise, as most anticipated these cuts to persist only into October.
In conclusion, the relentless surge in crude oil prices casts a formidable shadow over India’s economic stability, affecting trade balances, currency values, and inflation levels. While the markets currently maintain resilience, the trajectory of Brent crude remains a pivotal factor in this intricate economic equation.
