When the price of Brent crude oil goes up by $10, it makes India’s Current Account Deficit increase by 0.5%. This is according to V.K. Vijayakumar, the Chief Investment Strategist at Geojit Financial Services.
Higher crude oil prices are good for countries that export oil but not so good for countries like India that import it. When oil prices rise, it makes the Indian Rupee (INR) lose value, and that causes prices of imported goods to go up, which is what we call imported inflation.
Companies that use oil as a raw material in their production also suffer when crude prices go up because it makes their costs higher. This, in turn, can negatively affect the stock market. However, right now in India, the stock market doesn’t seem to be reacting much to the rising oil prices.
The reason for this is that India is experiencing good economic growth (GDP growth), companies are making decent profits, and there’s a lot of money flowing into the market from investors. These positive factors are offsetting the negative effects of expensive crude oil. But if the price of Brent crude goes up to $100, things might change, says Vijayakumar.
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According to a report by CareEdge Ratings, the recent increase in crude oil prices is mainly because some major oil-producing countries like Russia and Saudi Arabia have said they’ll produce less oil. However, it’s expected that from 2024 onwards, the sluggish global demand for oil will balance out this situation.
Don’t expect the prices you pay for petrol and diesel at the gas station to go up much. Oil companies that sell these fuels (Oil Marketing Companies or OMCs) will likely face pressure not to raise the prices too much, so there shouldn’t be a big impact on inflation.
Even the government’s finances (fiscal balance) aren’t expected to be hit too hard because OMCs will bear most of the burden of higher fuel prices.
The report suggests that if the average price of the Indian crude oil basket remains around $90 per barrel for the rest of the fiscal year, India’s full-year Current Account Deficit (CAD) might increase by 20 basis points to 1.8% of the Gross Domestic Product (GDP).
