Oil Price Surge Threatens India's Economy, May Widen Deficit to 3.5%

A sustained rise in global crude oil prices could widen India's current account deficit (CAD), the report from Brickwork Ratings said.

Rising crude prices are likely to weigh on growth and inflation, the report said, adding that India's CAD is estimated at 1.3 per cent of GDP and that for every $10 per barrel increase in oil prices the CAD could widen by about 50 basis points.

A $15 rise per barrel could push the deficit to 1.9 per cent and to about 3.5 per cent with a $40 rise per barrel, the report further said.

Higher oil costs would first hit the external sector by raising India's import bill, which can put continued pressure on the trade balance, especially since the country relies heavily on energy imports. the report added.

If oil prices remain high for a prolonged period, policymakers may need to carefully balance controlling inflation while supporting growth, the report said.

The ratings agency flagged inflationary pressure from fuel and transport costs, saying consumer price inflation, currently estimated at 4.2 per cent, could rise to about 4.65 per cent with a moderate oil price increase and to around 5.85 per cent if prices rise sharply.

"The currency outlook is also closely tied to oil prices. As crude prices rise, the Indian Rupee is expected to weaken, with estimates suggesting it could move toward around INR 93 per $ with a moderate increase in oil prices and closer to rupee 95.8 per dollar if prices rise sharply, " the report said.

A weaker rupee could make imports more expensive and add to inflation, it added.

- IANS