Will recent surge in crude oil price impact India’s current account deficit in the near term?

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Updated: January 08, 2020 5:18 PM

According to Singapore-based DBS, the surge in crude oil prices on the back of top Iranian killed by US airstrike poses a threat to India’s current account deficit but Indian experts are of the view that impact on CAD is unlikely to be a challenge for now.

Oil prices, Oil prices in india, iran attack, iran missile attack on us, There would be some pressure on CAD if the price surge persists for a longer duration.

The surge in crude oil prices on the back of top Iranian killed by US airstrike poses a threat to India’s current account deficit (CAD), said Singapore-based DBS in a note. However, Indian experts are of the view that impact on current account deficit is unlikely to be a challenge for now. There would be some pressure on CAD if the price surge persists for a longer duration.

“We are hugely dependent on crude and gold imports and both commodities have recently gone up due to the geopolitical issues in the middle east. There is a risk that if the prices continue to stay at a higher level, there would be pressure on CAD. Meanwhile, the rupee has also depreciated,” Siddhartha Khemka, VP – Head of Research at Motilal Oswal Financial Services, told Financial Express Online.

The real impact will be felt if crude remains at an elevated level for the next few days and may hit the next year’s budget and financial calculations, Kemka added. India, which imports 84 per cent of its crude oil requirement, is closely assessing the activities in the Middle-East. Brent crude rose to $69.16 a barrel, the highest since attacks on Saudi Arabian oil infrastructure in September.

Nevertheless, a widening of the current account deficit may not be such a big challenge for now, Abhimanyu Sofat, Head of Research, IIFL Securities, said. Crude prices going up can adversely impact, but there has been some de-escalation from Trump and it might not get into a full-blown war, Abhimanyu Sofat told Financial Express Online.

“The challenge has more to do with a fiscal deficit which is close to 10 per cent if I include the states and central PSUs. We don’t have enough money because tax growth has come down and expenditure is high which is a bigger concern for us right now,” said Sofat. If the global oil prices increase, India, which is already facing problems with its fiscal deficit with expenditure on the higher side, may have to pay more for its oil imports.

Meanwhile, in this financial year, India’s current account deficit (CAD) has reduced to 0.9 per cent of GDP accounted at $6.3 billion for the second quarter ended September 30, 2019 as against 2.9 per cent of GDP ($9 billion) in Q2FY19.

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