By Priyansh Verma and Manish Gupta
The Brent crude oil price, which had topped $90 a barrel (bbl) on Tuesday, is expected to stay at similar levels in the near-term, according to experts. However, they don’t expect this to have any significant impact on domestic inflationary pressures, given the slim chances of any pass-through of high crude oil prices to retail consumers.
“The weight of crude oil in CPI is around 2.3%, if the entire cost is passed, then the 10% increase will lead to 0.23% increase in headline CPI,” he said.
India Ratings and Research Chief Economist Devendra Kumar Pant said that the inflation impact of global commodity especially crude depends on several factors – crude oil prices (in USD-term), currency value (USD-INR) and the extent of pass through to consumers. “If the entire increase is passed through to consumers, keeping duty structure same, would translate in 42 basis points (bps) increase in retail inflation.”
On Thursday, Brent crude was trading at $90.2/bbl. Brent crude had last touched the $90 a barrel-mark in November 2022. However, post the announcement of extension of Brent crude production cuts till December-end by Russia and Saudi Arabia, analysts feel Brent crude price may stay in the range of $85-$95 a barrel in the near term.
“Brent crude’s price will remain between $85 and $95 per barrel. The average for 2023-24 is somewhere in the range of $80 to $95 but in the near term probably between $85 and $95 till March 2024,” said Prashant Vasisht, senior vice president, corporate ratings, ICRA.
The Reserve Bank of India has projected CPI inflation to average 5.4% in 2023-24. For its projections, the RBI has assumed the price of Indian crude oil basket to average $85 a barrel in the current fiscal year.
In the first five months of 2023-24, the price of Indian crude oil basket averaged $80 a barrel, according to data on the Petroleum Planning and Analysis Cell. So far in September, Indian crude oil basket’ price has averaged 89.81 a barrel. The basket comprises of sour grade (Oman & Dubai average), and sweet grade (Brent dated) of crude oil processed in Indian refineries in the ratio of 75.62:24.38.
Kotak Mahindra Bank’s Chief Economist Upasna Bharadwaj said that every $10 barrel increase in the price of crude oil causes CPI inflation to rise by 30-40 bps.
Impact on twin deficits
As crude oil constitutes a chunk of India’s overall merchandise imports, higher prices would lead to higher import bill, and subsequently a higher current account deficit.
“We expect current account deficit in 2023-24 at 1.8% of GDP as compared to 2% deficit in 2022-23, assuming Indian Crude Basket averages at US$85 per barrel in the remainder of 2023-24,” said Gaura Sen Gupta, economist, IDFC FIRST Bank. “In case crude oil prices average at US$ 90 per barrel in the remainder of 2023-24 then CAD could rise to 1.9% of GDP in the current financial year.”
Further, a sustained high price of crude oil may also prompt the government to cut excise duty on fuels, if the need arises. In that case, the fiscal deficit might come under strain, but that seems unlikely as OMCs are expected to bear the price-rise brunt. The government has pegged the fiscal deficit at 17.868 trln rupees, or 5.9% of GDP.
“My belief is unless the crude price crosses $100/bbl meaningfully and sustainably, the OMCs would be expected to bear the burden, without any direct impact on fiscal deficit. This could potentially lead to lower dividend payout but even that appears unlikely as the dependence on dividend will be high this year to prevent fiscal deficit from moving higher,” said Kunal Kundu, India economist, Societe Generale. “So, as of now two visible impacts: OMCs would have to bear the burden and higher trade deficit potentially putting pressure on the currency,” he said.
The rupee closed today at a record low of 83.22 against the US dollar, primarily due to expectations of strong dollar demand on the back of resilient US yields, which caused Asian currencies to depreciate.