Crude Oil Forecasts $100 mark- Impact on Indian Economy

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Rising crude oil prices resulting into the concerns regarding return of above $100 per barrel mark. Oil producing nations would celebrate the breach of mark but it bodes badly for oil importing nations.

Last week, The U.S. President Donald Trump in a speech in U.N. assembly reiterated regarding impending sanctions on Iran. The U.S. sanctions would come into effect from November 5th which means India if comply with sanctions would be more dependent on Middle East countries like Saudi.

Indian refiners are already planning not to buy oil from Iran starting November. The sanctions on Iranian oil are credit negative for Indian refiners because their supplier concentration will increase after the sanctions take effect.

What does it mean for global growth? Higher oil prices would hurt household incomes and consumer spending, but the impact would vary. Europe is vulnerable given that many of the region’s countries are oil importers. China is the world’s biggest importer of oil and could expect an uptick in inflation.

Can the world economy absorb oil at $100? $ 100 per barrel certainly would impact world economy including India but impact would not be as severe as it was in 2011-2013.

  1. Higher General Prices: Overall prices of goods are higher than compared to 2011-2013 which means impact would be lower.
  2. The Shale Gas revolution: The shale gas revolution would also reduce the impact of high crude oil prices.

 

Who wins from higher oil prices?  Middle East countries, Nigeria and Colombia set to be the biggest gainers.

Who Loses? India, China, Taiwan, Chile, Turkey, Egypt and Ukraine are among the nations who would take a hit. Paying more for oil will pressure current accounts and make economies more vulnerable to rising U.S. interest rates.
What does it mean for world’s biggest economy?  A run-up in oil prices poses a lot less of a risk to the U.S. than it used to, thanks to the boom in shale oil production.

Effects of rising crude oil prices on Indian economy.

  1. Inflation: Higher crude oil prices would push prices in general goods market higher.
  2. Impact on Rupee: Rupee could further depreciate
  3. Fiscal Deficit: Higher prices will have adverse impact on fiscal deficit.
  4. Current Account Deficit: Higher import bill in conjunction with depreciated rupee means higher current account deficit.
  5. Impact on Mid-Cap companies: As rupee depreciating there is trend of selling shares of mid cap companies.

 

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