Global crude prices have hit $80 a barrel after a gap of three-and-a-half years, increasing the pressure on inflation and on the Reserve Bank of India to hike the policy rate. While the fiscal math of the government will have to be re-done given the the Budget had assumed oil prices at around $65 a barrel, officials played down the concerns.
The current account balance may also come under pressure. India imports around 80 per cent of its crude oil needs. “If crude oil stays over $80 a barrel, we are looking at an average inflation rate of 5 per cent and a peak of 5.9 per cent. If it stays this way, the RBI may hold rates in June, but there will be a rate hike in August,” said Abheek Barua, chief economist, HDFC Bank.
Inflation based on the consumer price index rose to a three-month high of 4.58 per cent in April from 4.28 per cent in the previous month, even as the government refrained from fully passing on the hike in global crude oil prices to consumers due to the Karnataka elections.
Since then domestic petrol prices have been hiked by 69 paise a litre. A 22 paise hike was announced on Thursday. In Delhi, petrol prices stood at Rs 75.32, the highest in almost five years. Similarly, diesel prices have gone up by 86 paise a litre, of which a 22 paise increase was announced on Thursday. This took the the rate to Rs 66.79 a litre in Delhi.
A rate hike at the upcoming June policy could not be ruled out, HSBC economist Pranjul Bhandari said. HSBC Global Research is now forecasting two rate hikes of 25 basis points each in 2018, probably in August and December.
The RBI’s repo rate is currently 6 per cent.
Ashima Goyal, a member in the economic advisory council to the Prime Minister, however, said the RBI had not cut rates in recent monetary policies as there was a risk of higher crude oil prices. And since this risk is not for a long tenure, the apex bank might follow a wait-and-watch policy.
Sanjiv Singh, chairman of Indian Oil Corporation, said, “Geopolitical issues are governing pricing at the current point of time. We were operating earlier also in a high price regime. For oil marketing companies, the working capital requirement and internal energy cost also goes up in a high price environment.”
He said product prices were a combination of international prices and taxes. “We were holding prices for about 19 days, only because fundamentals in international market were not right,” he said.
The finance and petroleum ministries are expected to hold a high-level meeting later this month to discuss a cut in the excise duty on petrol and diesel. According to industry experts, the government is expected to go in for at least a Rs 2 cut in excise duty. The Indian basket crude oil price was seen at $75.94 a barrel on Thursday.
Petroleum Minister Dharmendra Pradhan said he had spoken to Saudi Arabia’s Minister of Energy, Khalid Al Falih. “I expressed my concern about rising prices of crude oil and its negative impact on consumers and the Indian economy...reiterated the need for stable and moderate crude oil prices,” Pradhan tweeted.
Oil prices hit $80 a barrel on Thursday for the first time since November 2014 on concerns that Iranian exports could fall because of renewed US sanctions reducing supply in an already tightening market.
Brent crude futures reached an intra-day high of $80.18 a barrel before receding to $79.67. US West Texas Intermediate (WTI) crude futures were up 41 cents at $71.90 after also hitting their highest since November 2014, at $72.30 a barrel.
The Indian basket crude oil price was seen at $75.94 a barrel on Wednesday. Tuesday’s closing price at $76.43 was the highest since December 1, 2014. However, since the rupee has depreciated since then, the impact on India’s trade balance will be higher. The rupee was at 68.1 to a dollar on Tuesday against Rs 64.1 on December 1, 2014.
“Right now, for exchange rate and oil prices, you cannot make anything more than a two-week prediction. It would be too audacious to look beyond that. For that period, we expect oil to be in the $75-80 per barrel range,” said Madan Sabnavis, chief economist, CARE Ratings. “If nothing more happens in terms of a geopolitical shock, oil could revert to $70-75 level,” he said.
“There is no demand-supply mismatch. It is a low demand season right now. It is only the supply which is getting affected, not because of the ability to supply, but because of the Iran issue,” Sabnavis added.
A finance ministry official said the impact of crude oil prices on the fiscal deficit, current account deficit and headline retail inflation would depend on how much longer the high prices persist.
The official said the timing of an excise duty cut would depend on the revenue proceeds of the Centre from the goods and service tax.
For 2018-19, the Centre has assumed an oil price of $65 a barrel. At that price, the petroleum subsidy has been budgeted at Rs 249 billion. The fiscal deficit for the year has been budgeted at Rs 6.24 trillion, or 3.3 per cent of gross domestic product.
The Centre has projected the fiscal deficit will come down to 3.3 per cent of GDP in 2018-19 from 3.5 per cent in 2017-18. It is primarily the fiscal balance of the Centre and states that has prevented Standard & Poor’s and Fitch from upgrading India’s sovereign credit rating from the lowest investment grade.
For every $1 rise increase in crude oil prices, the impact on the current account deficit is likely to be around $1 billion. The current account deficit was 2 per cent of GDP in the quarter ended December, up from 1.1 per cent in the September quarter.