BIZ-RBI-CRUDE

A sudden surge in crude prices can

upset the nation's key macro-stability parameters, as it can

sharply spike the current account deficit (CAD), inflation and

the fiscal numbers, whittling the benefits of higher growth,

warns an RBI study.

Since the country is heavily dependent on oil imports

to the tune of over 80 per cent for meeting its domestic

demand, it remains susceptible to global crude price shocks.

Besides CAD, rise in crude prices can also impact

inflation and fiscal deficit, says the report.

The international crude prices increased by around 12

per cent between April and September 2018.

The mid-year spike in crude prices happened mainly due

to spurt in demand, on the back of global growth revival, and

partly due to geopolitical risks that led to supply-side

shocks.

However since mid-November 2018, the crude prices have

declined significantly but they remain volatile.

"An increase in crude price worsens the CAD and this

adverse impact cannot be significantly contained through a

higher growth. So, a crude price shock will be followed by

high CAD to GDP ratio," says the latest issue of the Mint

Street Memos titled 'The Impact of Crude Price Shock on CAD,

Inflation and Fiscal Deficit' pencilled by in-house economists

at the central bank.

The finding shows that in the worst case scenario,

when crude prices hit USD 85/barrel, the deficit on account of

oil balloons to USD 106.4 billion, which is 3.61 per cent of

the GDP.

"Every USD 10/barrel increase in crude prices leads to

an additional USD 12.5 billion deficit, which is roughly 43

bps of the country's GDP. So, every USD 10/barrel increase in

crude price will shoot up the CAD/GDP ratio by 43 bps," it

says.

The study says crude price shock will increase

inflation, if the price increase is passed on directly to the

final consumers.

"Under the most conservative estimate, we quantify

that a USD 10/barrel increase in crude price at the price of

USD 65/barrel will lead to a 49 basis points increase in

headline inflation. A similar increase at USD 55/barrel gives

around a 58 bps increase in headline inflation," it says.

Further, if the government decides on a zero

pass-through to the final consumers, a USD 10/barrel spike in

crude prices could increase the fiscal deficit by 43 bps.

This zero pass-through scenario allows us to put an

upper band on the amount of fiscal slippage, it adds.

The actual inflation and fiscal deficit will finally

depend on the level of government intervention (changes in tax

and subsidy) in the domestic oil market, the study concludes.

PTI HV BEN

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(This story has not been edited by Devdiscourse staff and is auto-generated from a syndicated feed.)