External sector could face some anxious moments, says CEA Nageswaran

He said that the way the oil price cap is being discussed has encouraged oil and gas traders to stock up on volumes, creating unintended consequences

The country’s external sector could face some anxious moments this financial year, as the proposed oil price cap on global crude could instead serve to raise those instead, said V Anantha Nageswaran, chief economic adviser to the finance ministry, on Saturday.

“The way the oil price cap is being discussed has encouraged oil and gas traders to stock up on volumes, creating unintended consequences. This could create additional pressure on our balance of payments”, he said at the release of NCAER’s mid-year review of the economy, on Saturday.

G7 nations have signed a plan, under which companies buying Russian oil and natural gas for supply to these countries and a bloc of others shall buy those only at a capped price. The plan comes into effect a month from now on December 5, to restrict Russia from benefiting from these sales to finance its war.

He added that India’s foreign exchange reserves will be adequate to ride through this phase. Portfolio investors turned positive on India in early November. Foreign Portfolio Investors (FPIs) have net bought $1.9 billion of Indian equities, NSDL data showed after a minor dip through both September and October.

“All things considered, including the oil price turmoil, the external sector shall be manageable this year, possibly with some anxious moments”, he added. But in the medium term India’s growth sustainability is very clear, he added. The NCAER mid-year review, released by Director General Poonam Gupta, pegs the current account deficit for FY23 in a range of 3 to 3.5 per cent.

According to the CEA, the strength of the economy was also visible through the stable yields in the bond markets. He said while there was speculation that India might enter some global bond indices, which have subsequently died down, the investors have remained invested in India. The range of movement in the yields has been narrow throughout the year. “When the expectation about inclusion in the global bond indices died down there was a 10-20 back up in the yield but you cannot link it with the news, because at the same time US bonds were also strengthening. Money may have flowed out because of that too”.  

In reply to a question, he said currently the risks for India all emanated from abroad. “There is a risk of an accident happening in the shadow banking world of the USA in 2023 because the financial markets are still in denial there”. He explained that while the US Fed has been raising rates, the financial markets are still convinced that if there is a risk of a market failure, “Powell has their back covered”. The rally in the bond markets is continuing there though the Fed has been at pains to deny this perception, he added.