Rising crude oil prices likely to widen India’s current account deficit in 2018 - Scotiabank

Crude oil prices have reached its highest level since July 2015, owing to the possible nine-month extension to the existing production cut deal, Saudi Arabia’s latest anti-corruption purge and increasing tensions between the kingdom and Iran. India is the second-largest crude oil consumer in Asia after China and the third-largest one on the world. The country’s crude oil imports averaged 4.4MMbpd in the initial nine months of 2017. India’s oil import bill was up 34.2 percent year-on-year to USD 72.5 billion in the first nine months, accounting for 22 percent of India’s total merchandise imports in the period.

Increasing crude oil prices would be able to broaden India’s current account deficit into the year of 2018 and lower the government’s exercise duty in the meantime, noted Scotiabank in a research report. An increase of USD 10 barrel in the oil prices might worsen India’s annual CAD by USD 16 billion. Latest data indicated that India’s CAD broadened to a four-year high of USD 14.3 billion, or 2.4 percent of GDP, in the second quarter, mainly because of a larger trade deficit. In the first quarter, India’s deficit came in at USD 3.4 billion.

The effect of recent increases in crude oil prices is not substantial. But as India’s continued CAD has to be financed by consistent net direct investment and portfolio investment inflows, a more marked rise in oil prices would undermine the Indian rupee, especially if portfolio flows turn negative simultaneously. Moreover, the prospect of a U.S. tax overhaul would prop the dollar widely should the tax bill pass congress on schedule. Meanwhile, sharply rising oil prices might spur market concern over the country’s inflation outlook and as well and then restrict scope for the RBI to deliver more monetary easing measures to increase India’s economic growth. Fuel & Light prices account for 6.8 percent of the 2012 CPI basket.

“USD/INR is expected to trade in a range of 64-66 with an upside potential and will head for 66 if the pair breaks above the 200-day MA resistance”, added Scotiabank.

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