Hike In Oil Price Is Likely To Affect Indian Economy In 2020

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Over the weekend, Indian markets rejoiced the possible impact of the FM’s improvements package for housing and exports. However, things did take a fierce twist over the weekend. Houthi rebels supposedly carried out drone attacks on the chief facilities of Saudi Aramco. Not surprisingly, Brent Crude reported the sharpest single-day gain since 1991 after Saudi Arabia declared plans to cut 50% of its production. While the influence was observed across the world, the cuts in India were deep.

Reflecting oil prices — and India’s ruthless demand for it — will push up oil imports and extend its current account debt, which measures the movement of goods, services, and investments in and outside of the country, economists assume.

That widening shortage will end in a weakening rupee, they say, as more imports mean India has to purchase more foreign currencies to satisfy its needs.

Biswas prophesied that the rupee will deteriorate further, falling to 72 rupees against the dollar by the end of 2018 and touching 74 rupees by August 2019. The rupee was last at 70.16 facing the dollar at the close of Monday — drawing a 9.96 percent drop since the start of this year.

The rupee, along with the Indonesian rupiah and, will resume being the weakest in Asia, said an ANZ Research journal.

Oil estimated to cost India more

For the rest of 2020, the oil import statement is expected to rise for India, Asia’s third-largest market.

“The net trade oil shortage has broadened considerably, owing to a mixture of high oil costs and a vulnerable currency,” said DBS economist Radhika Rao. She stated that the oil import bill in the financial year 2020 could nail above $114 billion. Between 2018 and 2019, oil imports were around $88 billion — higher than the previous year’s value of $70 billion.

To counter the burden on growth, India needs to decrease its reliance on oil, but regularly rising consumption in the nation is not helping, according to a new Oxford Economics statement.

The report projected India’s oil demand will rise to 4.4 percent yearly in the next decade, compared to 3.7 per year in the last 10 years.

How oil affects the twin deficiencies?

The most significant economic impact of oil is on the fiscal deficit and current account deficit. Both are expected to be negatively impacted. From a financial deficit point of view, higher oil values limit the government space to extract profits out of oil. From a current account deficit view, an addition of $10/bbl extends the CAD by 50-60 bps. That is because the sales deficit gets back to above the $17 billion per month point. Fall in oil prices added to the lower fiscal deficit in 2014 and 2016 triggering off a larger bull market rally.

Oil spike and the rupee influence

If you have seen definite spikes in oil prices in late 2018, you would have seen that the rupee also decreases simultaneously. That is because a clear spike in oil (as we saw on Monday) makes the rupee very weak. Not only the trade deficit and the CAD will be costlier and undermine the rupee, but higher oil rates also make importers and foreign currency borrowers race for forwarding defense. That produces a sudden spike in demand for the dollar and reduces the rupee.

Does oil affect interest rates?

There may not be an immediate impact but there is an auxiliary impact of oil on interest rates. For example, higher oil costs mean higher expansion and that would drive up bond yields, suggesting at RBI going slow on price cuts. Secondly, actual interest rates would reach down. In the last few years, India has drawn global bond investors due to its high real prices. Spike in oil costs could indicate either FPI outflows or higher rates to repay. Very often, the RBI has also practiced repo rate hikes as a plan to defend the rupee when oil spikes.

How is oil expected to influence equities?

There are a number of ways oil influences equities. Firstly, distinctly higher oil prices mean that inflation moves up and that is usually negative for equities as a body. Secondly, there are some specific sectors like wheels, paints, oil marketing firms, etc. that utilize crude oil as inputs. For them, it means the squeezing of perimeters due to higher input prices. Thirdly, the market for automobiles, transportation services are all reliant on oil prices and a spike in oil prices could further depress demand. Auto demand has dropped over 30% consistently every month and could increase the spike in oil prices.

OPEC Influences Prices

The next factor is when OPEC members decrease their output. That’s what caused high oil rates in 2017 and 2018. On November 30, 2016, the company first admitted cutting production by 1.2 million vessels per day beginning from January 2017. It agreed to increase production cuts through 2018.

Supply and Demand Influence

As with any products, stock or bond, the rules of supply and demand cause oil prices to increase. When supply outpaces demand, prices fall and the inverse is also correct when demand outpaces supply. The 2014 drop in oil prices can be associated with weaker demand for oil in Europe and China, joined with a constant supply of oil from OPEC. The excess supply of oil caused oil prices to drop distinctly. Oil prices have swung since that time, and are priced at around $54 per barrel as of September 2019.

In a nutshell, the pin in oil could hit several macros negatively. The goal is that stockpiles and global economic instability will have a lid on crude prices.

 

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