Due to supply problems caused by growing Russia-Ukraine hostilities, Brent crude crossed $113 per barrel on Wednesday, the highest in nearly eight years, putting the Indian economy at risk of an oil shock.
According to the latest Economic Survey for FY22, economic growth will be between 8% and 8.5 percent, assuming crude oil prices of $70-$75 per barrel.
Fears of supply-side disruptions fueled the rise, which followed Russia’s invasion of Ukraine and Putin’s deployment of soldiers to separatist areas Donetsk and Luhansk in Ukraine.
The Russian invasion of Ukraine might not only impair global crude supply, but possibly lead to US and European sanctions. Following tensions between Russia, the world’s second-largest oil exporter, and Ukraine, oil prices have risen in recent months due to supply fears.
There will be inflationary consequences. India imports more than 80% of its oil needs, while only about 25% of its total imports are oil.
The current account deficit — the gap between the values of goods and services imported and exported — will be impacted by rising oil costs.
As crude oil prices rise, the subsidy on LPG and kerosene is projected to rise as well, increasing the subsidy bill.
High crude oil prices contributed to a spike in gasoline and diesel prices in 2021, which reached new highs across the country.
Pump prices plummeted in November when the federal government reduced excise taxes on gasoline and diesel by Rs 5 and Rs 10 per litre, respectively, and most states followed suit by lowering VAT.
Even though Brent crude declined from over $84.7 per barrel at the beginning of November to around $70 per barrel at the beginning of December, oil marketing corporations have not altered pricing since the tax reduction in November.
Consumers may face higher fuel prices as a result of rising oil prices now, even though they did not profit fully from the drop in crude prices in November and December.
Investors and Market
In response to increased crude prices, investor mood has taken a hit in recent days. Between January and February, foreign portfolio investors turned net sellers, withdrawing a net of Rs 51,703 crore from Indian shares, causing equity markets to fall and become more volatile.
From $73.8 per barrel on January 12 to $75.09 on Thursday, the rupee has lost nearly 1.7 percent against the dollar.
Markets are expected to remain turbulent in the short term due to geopolitical concerns, .
Visibility of Impact
We feel Higher oil prices are likely to be one of the economic consequences of the Russia-Ukraine situation.
Given India’s massive oil consumption, much of which is imported, increasing oil prices are likely to have an impact not just on the trade deficit and currency, but also on inflation and the fiscal situation.
It’s worth noting that the Union Budget and the Reserve Bank of India’s monetary policy announcements were made well before the crisis and did not account for the impact of the crude price shock.
As a result, both the Budget and the RBI used a conservative projection of crude prices of US$ 75/bbl, which will be a challenge in the future.
Intern – Prashanti Forex
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