Crude oil prices above $110 per barrel amid the West Asia conflict could widen India’s current account deficit, weaken the rupee and raise inflation risks as energy supplies tighten.
With the Strait of Hormuz disrupted and crude prices surging, India faces higher import costs, currency pressure and potential inflationary risks that could weigh on growth.
With crude oil prices soaring past $110 per barrel, India is in a pickle. The sharp rise in prices—from $60 per barrel at the start of January—will translate to a much bigger oil bill on import volumes of 5 million barrels a day, widening the current account deficit and pressuring the currency.
Indeed, with no resolution in sight to the war in West Asia, India Inc must brace for challenging times. A hit to production in some sectors, disruption in imports, higher inflation, and a weaker currency could lead to loss of growth momentum. The government is aware of the repercussions of the war persisting, with the finance ministry having flagged the risks.
The immediate problem
The immediate problem is, of course, sourcing adequate quantities of oil and gas, worrying given the very limited reserves. Since the Strait of Hormuz is no longer open for business, supplies of around 45-50% of our imported oil and gas have been cut off. Around $30 million barrels are reportedly being sourced from the Russian oil that is “already stranded at sea”.
But these are hardly meaningful quantities and they certainly cannot meet the larger needs of the economy. India could, of course, look to source more Russian Urals even if it comes at at elevated prices. Again, if the G7 nations do release emergency reserves, they would add to supplies in the market.
As of now, though, it looks like sourcing adequate imports both of oil and gas could be difficult, especially if the hostilities are prolonged. While External Affairs Minister S Jaishankar said on Monday that the government is committed to safeguarding energy security, in the near term user-industries are likely to face a shortfall of both oil and gas.
Implications for the oil and gas market
Already, gas producers are understood to be reviewing allocations to industrial users. However, priority sectors—both piped and compressed natural gas—are expected to be adequately supplied.
For the moment, the government is unlikely to raise pump prices of auto fuels given several state elections are around the corner. Passing on the increases to consumers would be inflationary; by one estimate from the central bank, a 10% rise in oil prices drives up inflation by roughly 30 basis points.
The government could, at some point, absorb some of the costs and compensate the oil marketing companies for their under-recoveries. While consumers may be protected from the inflation from higher prices of petrol and diesel—which would have fed into domestic inflation—there will be some impact on prices from imported inflation.
The war in West Asia has seen the dollar climb to its highest levels in about two months as it once again becomes a safe haven currency. Treasury yields have risen with apprehensions that energy-driven inflation could see the US Fed keeping rates higher for longer.
Back home, the rupee has been a big casualty of the sharp spike in oil prices, falling to a record low of Rs 92.33 against the dollar. With no visibility on the end to the conflict there is the likelihood that the currency could depreciate further, not just making imports more expensive but also keeping away foreign flows into Indian stocks and bonds.
Both markets have sold off in the last couple of sessions and could remain under pressure.
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