A fall in global oil prices provides India with the opportunity to strengthen its balance sheet, a deputy governor of the Reserve Bank of India (RBI) said on Monday, alluding to the need to use savings to invest, build reserves and cut subsidies.
India imports nearly two-thirds of its oil requirements and a lower oil import bill is likely to help slash the country’s current account deficit, as well as help ease inflation.
The government’s annual budget, due to be presented on Saturday, is widely expected to include cuts to subsidies, but not by as much as some investors had hoped for.
“The oil price going down is an opportunity which should not be wasted and we should be bolstering our balance sheets,” Deputy Governor of the Reserve Bank of India, H.R. Khan, said in a speech to management students.
India’s fuel subsidy comprises about a quarter of the total subsidy amount of nearly 2.6 trillion rupees ($41.81 billion) and the fall in oil prices provided the government room to impose an excise tax which is expected to earn an additional of around 200 billion rupees.
Most analysts expect oil prices to stay within $70 a barrel, which will enable the government to save on its fuel subsidy as well as mop up more revenue through excise tax.
India has also strengthened its foreign exchange reserves to record highs, preparing for possible shocks including any adverse impact from an increase in U.S. interest rates.
“The big risk as all of us know is of U.S. (Federal Reserve) action — the scope, the speed and the size of the rate hike,” Khan said on Monday.