Oil spike can reduce rate cut chances

NEW DELHI: Oil prices at a four-year high and depreciating rupee have reduced the chances of a rate cut in the current financial year besides being an overall negative for growth. Economists say that a $ 10 per barrel rise in crude could increase current account deficit (CAD) by 50 basis points and fiscal deficit by around 8 basis points as a percentage of GDP.

The highest impact will be on CAD followed by fiscal deficit and then inflation, according to DK Joshi, chief economist at CRISIL. “It is a very unstable kind of situation and we will have to see how oil settles in the medium term, beyond two months. There will be some fiscal impact,” said Abheek Barua, chief economist at HDFC Bank.

The IMF’s World Economic Outlook, April 2018, has assumed the average crude oil prices to increase by 18 per cent to $ 62.3 per barrel in 2018 over the previous year. CAD, a key measure of macroeconomic stability, rose to 2 per cent of the GDP or $ 13.5 billion in the December quarter, up from $ 8 billion or 1.4 per cent in the year-ago period.

Madan Sabnavis, chief economist at CARE Ratings said that a 10 per cent rise in oil prices will lead to half a percent rise in Wholesale Price Inflation since the fuel element is high there. Fuel and power have a 13.15 per cent weight in WPI. “Ceteris paribus, CAD could rise $ 6-7 billion,” he said. High oil prices for a prolonged period (more than a quarter) will have implications for fiscal and current account deficit, according to DK Pant, chief economist at India Ratings, a Fitch group company.