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Sudden rise in crude can spoil India's Budget math

Last Updated 03 January 2020, 18:21 IST

Brent crude futures surged 4.5% to $68.23 per barrel on Friday after US airstrike killed Iran's top military leader, upping the risk of a broader conflict between the two major oil producers – USA and Iran.

On India, the immediate impact of the crude spike was felt on the rupee as it plunged by 42 paise to close at 71.80 against the US dollar and, haven assets -- gold and silver -- prices jumped sharply on escalating demand by investors.

In the coming days, it will also translate into a hike in transport fuel bill. If the tension persists, the second-round impact will be felt when higher crude prices zoom the country's oil import bill, stoke inflation, dis-balance government's revenues, increase all the three deficits -- current account, fiscal and trade deficit -- since India is a net importer of crude oil and ships 80% of its requirement every year.

Coming close on the heels of the Union Budget, it will also restrict the government from handing out major tax cuts and other largesse to lift the economy. The Reserve Bank of India, which has already flagged fuel price concerns, may not be able to cut key interest rates even if the economy continues to slowdown.

Despite the US seeking to restrict India's oil purchases from Iran, the country remains a major buyer of Tehran oil and shipped about 23 million tonne from the Persian Gulf country in 2018-19, which was 5% more than a year before. Iran is India's third-largest oil supplier behind Iraq and Saudi Arabia. Not only oil, but India also buys natural gas from Iran.

India has, therefore, called for peace, stability and security in the region. Escalating tension could not only result into a potential loss of Iranian oil supply but put in danger the Iraqi and Saudi Arabian region and lead to disruption in seaborne crude supplies if US ships in the region are targeted by Iran.

The US too is India's significant crude supplier. The country imported 6.4 mt crude oil from the US in 2018-19.

While ballooning import bill puts pressure on current account deficit, the depreciating rupee makes matters worse since India pays for crude in dollars. CAD is a result of higher import over exports in a country.

A rise of crude prices by $10 can push inflation up by about 49 basis points and the fiscal deficit by about 43 basis points, according to RBI. Brent has jumped over 14% since December 2. It can, therefore, spoil India's Budget math and limit any major concessions in the Budget.

On Friday, crude was trading at its highest level since the attack on Saudi Aramco installation in September last year when it touched $71.95 per barrel.

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(Published 03 January 2020, 18:21 IST)

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