Impact on CAD from rising crude oil, coal prices to be temporary: Report

The country meets 84 per cent of its crude oil demand from imports and the oil import bill was USD 57 billion or 2.1 per cent of GDP in FY21. The crude prices are up 30 per cent from August lows and are near three-year highs and any sustained rise in global oil prices is a negative shock to the economy in terms of a wider CAD, higher inflation and weaker rupee.

Spiralling crude and coal prices, which are at multi-year highs now, could pose only a “temporary spike in the current account deficit (CAD) and pull the rupee to down to the 78 levels”, but there are enough forex reserves to tide over such a crisis, according to a report, which also sees the crude oil prices falling to USD 68 a barrel by March.

“A USD 10 per barrel rise in crude oil price can widen the CAD by 0.5 per cent of gross domestic product (GDP) or by USD 14 billion. If crude price, which is at a three-year high now, scales to USD 100 per barrel, it could push the CAD to about 3 per cent of GDP but this will be just temporary,” said Swiss brokerage UBS Securities in the report on Thursday.

According to the report that could also mean the rupee plumbing to 78 to a dollar but the forex reserves at USD 637 billion is 2.3 times the 2013 levels. Coupled with this is the massive FDI inflows and the initial public offering (IPO) money flooding the markets both helping it recover fast.

The country meets 84 per cent of its crude oil demand from imports and the oil import bill was USD 57 billion or 2.1 per cent of GDP in FY21. The crude prices are up 30 per cent from August lows and are near three-year highs and any sustained rise in global oil prices is a negative shock to the economy in terms of a wider CAD, higher inflation and weaker rupee.

Forecasting for crude, which is at a three-year high now, settling down to USD 67 per barrel by March, UBS Securities India Chief Economist Tanvee Gupta Jain said that a USD 10 per barrel increase in crude prices will widen CAD by USD 14 billion or 0.5 per cent of GDP.

“If crude price touches USD 100 per barrel, it can temporarily push CAD to about three per cent of GDP and push the rupee temporarily down to 78 against the greenback,” she said.

She also said that unlike 2013 and 2018, the country is managing external vulnerability risks reasonably well. The war chest of USD 637 billion forex reserves is 2.3 times the 2013 low, FDI inflows are on an uptrend, and there is near-term support from forthcoming IPO and divestment flows, all go to take care of the crisis.

On the massive coal crisis wherein 40 per cent of power plants have coal stock for under four days, the report said, “India is the world’s fourth-largest energy consumer, and coal accounts for 55 per cent of its installed power capacity but 70 per cent of the total power generation.”

Also, despite having the world’s fifth-largest coal reserves, the country is a major importer. The imported call is 160 per cent more than the year-ago prices. If coal prices jump over 50 per cent, it can push up CAD by another 0.5 per cent of GDP.

The threshold CAD level for the country is 1.7-2 per cent of GDP, assuming potential real GDP growth of six per cent.

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