Will a cut in global oil supply shatter India’s hope to ease inflation, check trade deficit?

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Published: April 10, 2020 3:20:55 PM

Though it was unlikely that the falling oil prices could completely stabilise the economic turbulence, a significant reduction in import bill and inflation were expected.

oil, crude ol, petrol, diesel, oil supply, inflation, import bill, OPECIt is believed that even if the supply is cut, the unprecedented squeezing demand would not let the prices go up anytime soon. (Bloomberg image)

As OPEC and other oil-producing nations have agreed to cut their overall crude oil production by 10.0 mb/d from next month, India’s hope to ease inflation and narrow the trade deficit may shatter. Though it was unlikely that the falling oil prices could completely stabilise the economic turbulence, a significant reduction in import bill and inflation were expected. “The sharp reduction in international crude oil prices, if sustained, could improve the country’s terms of trade, but the gain from this channel is not expected to offset the drag from the shutdown and loss of external demand,” RBI said in its April’s Monetary Policy Report released yesterday. 

The collapse in crude prices should work towards easing inflationary pressures, depending on the level of the passthrough to retail prices, RBI added. On the contrary, if the Indian basket of crude oil prices increase by 10 per cent above the baseline assumption, inflation could be higher by 20 basis points and growth could be weaker by around 15 basis points, it further added.  

Given the oil glut and steep fall in oil prices, the Reserve Bank has also estimated that India’s oil import bill is expected to decline in March and this may compress the trade deficit further for the full year. However, with the latest agreement of OPEC and other oil-producing nations, the excess oil supply will be cut to support the oil prices. This may take away India’s perk of further low-cost imports. 

On the other side, it is believed that even if the supply is cut, the unprecedented squeezing demand would not let the prices go up anytime soon. “Even though OPEC and Russia have agreed to collaborate and end a weeks-long market-share war, the prices of oil are already reeling from the biggest ever demand collapse in history in which no achievable production cut agreement will ever counter the extreme demand destruction COVID-19 has caused,” said a report by Care Ratings

Meanwhile, crude oil and its products have a weight of 10.36 per cent in the WPI, therefore, any decrease in the price of crude oil would tend to impact the WPI inflation number proportionately. In the case of the CPI, the impact of crude oil prices is directly related to the pass-through to transportation fuels which has a weightage of only 2.39 per cent, the Care Ratings report added. 

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