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India’s Balance of Payment with rising crude oil prices

June 2, 2008

Business IndiaCrude Oil speculators have created a havoc in emerging countries like India. As the 10th largest oil importing nation in the world (oil imports are close to 70% of India’s crude oil requirements), a continued uptrend in prices will likely have repercussions on India’s Balance of Payments (BoP). With every US$1/bbl increase in oil prices likely to increase the import bill by US$700mn, if WTI touches US$150/bbl, the current account deficit (CAD) would widen to US$61.3bn or 4.7% of GDP v/s base case of the CAD at US$37bn or 2.8% of GDP. This would lead to a drawdown in reserves and much further currency weakening.

Currently, to compensate the oil marketing companies for the under-recoveries, the government is likely to issue oil bonds to the tune of Rs630bn (1.2% of GDP) in FY0. As every US$1/bbl increase in oil prices raises the under-recoveries by ~US$1bn, bond issuances could more than double to Rs1.5trillion (2.8% of GDP), if prices rise to US$150/bbl.

Impact of an Increase in the Indian Oil Basket on the BOP
If the crude oil price is going to hover around $115, $135, $150 and $200, then India’s Trade Deficit would widen to $115bn, $129bn, $140bn and $175 bn respectively. In order to bridge the trade deficit gap, if the Government decides to hike fuel prices, then the impact on inflation for the above said crude prices will be 4.70% 5.67% 7.48% and 12.40% respectively. Lets hope the crude prices stops boiling and settles down.

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