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India Sees Greater Risk of Crude Prices Staying High for Longer

(Bloomberg) -- India sees a greater probability of global crude oil prices remaining high for a longer period, a scenario that threatens to dent growth and fan inflation in Asia’s third-largest economy.

The government will have to watch crude prices before preparing any policy response, a finance ministry official told reporters in New Delhi, asking not to be identified, citing rules. Oil supplies from Iran are also likely to be constrained after the U.S. reinstated financial sanctions on the Islamic Republic, the official said.

Brent crude rose as much as 3.1 percent Wednesday to $77.20 per barrel, its highest level since November 2014. India’s central bank estimates oil at $78 a barrel would shave off 10 basis points from its 7.4 percent forecast for gross domestic product growth in the year to March 2019. Moreover, it expects costly crude could stoke inflation by 30 basis points.

Oil is India’s biggest import and elevated prices along with a weaker rupee will widen the trade deficit, fuel imported inflation and squeeze government finances. Data due Monday will show consumer prices probably accelerated to 4.42 percent in April from 4.28 percent the previous month, according to the median of 19 economists surveyed by Bloomberg.

With India importing more than two-thirds of its crude requirements, the weakness in the rupee will contribute to a deterioration in its current-account deficit. If Brent averages $75 per barrel in 2018, India’s current-account deficit would widen to 2.5 percent of GDP from 1.5 percent in 2017, according to analysts at Nomura Holdings Inc.

Ravindra Dholakia, a member of India’s policy rate-setting panel, also flagged the risks of high oil prices on government finances. The fiscal space to accommodate future higher oil price shocks seems to be absent given the slippage in India’s annual budget for the year through March 2019, Dholakia was cited as saying in the minutes of the February meeting of the Monetary Policy Committee.

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