Soaring crude oil prices have put India – a net importer – in a precarious position. As crude prices hit a 13-year high of $130 a barrel, the value of the rupee depreciated to a low of 77 rupees against the dollar. These two major concerns should have a significant negative effect on the economy if the trend continues. Experts estimate that crude oil at $100 a barrel and other commodity shocks in FY23 could reduce real gross domestic product (GDP) growth by up to 80 basis points, which could fall below 7%.
The depreciation of the rupee causes an increase in the cost of imported inputs and therefore an increase in imported inflation; higher cost of external debt; and a slight boost to exports and growth,” Madhavi Arora, chief economist at Emkay, told India Today. The depreciation could also tighten the RBI’s foreign exchange policy intervention stance and could lead to draining liquidity from the INR, she added.
A sharp drop in a short period could lead to nervousness in the financial sector, and extreme cases could lead to higher interest rates.
Rising import prices, especially for petroleum products, are pushing the overall current account deficit. And this has also been observed in the past.
“The current account deficit is expected to widen by nearly $14-15 billion (0.4% of GDP) for every $10 a barrel rise in the average Indian crude basket price,” according to ICRA. If the price averages $130 a barrel in fiscal 2023, the CAD will widen to 3.2% of GDP, crossing 3% for the first time in a decade, he added. .
With high import prices while simultaneously needing to shell out more rupees, retail inflation is affected – prices of household items rise. This trend has also been observed in the past. However, in recent years, this trend has not been very clear because several factors explain inflation.
“Without factoring in a full pass-through from oil prices to retail pump prices, retail inflation in FY23 could be more than 120 basis points higher than the modest estimate of 4 .5% of the RBI,” notes a report from Emkay Global. Every $10 per barrel increase in the price of Brent has an impact on retail price inflation in India by 30 to 35 basis points and on WPI inflation by 130 basis points, he added.
India is poised to bear the brunt of expensive crude oil due to its heavy reliance on imports. However, many other countries also witnessed the weakening of the currency during the Russian invasion of Ukraine.
While the Indian rupee has fallen by 3.5% since the start of 2022, the value of the Russian ruble has fallen by 73%, the Polish zloty by 11.6%, the Swedish krona by 9.7%, the new shekel Israeli 6.7% and the Mexican peso 3.8%, according to the International Monetary Fund.
On the other hand, the currencies of commodity-rich countries like Brazil and Australia have appreciated along the way. The Brazilian real has gained 9.6% while the Australian dollar has strengthened by 1.4% since the start of the year against the dollar.