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MOSL: INDIA STRATEGY-Crude turning from a headwind to a tailwind; Bodes well for Indian macros

INDIA STRATEGY: Crude turning from a headwind to a tailwind; Bodes well for Indian macros

 

Cooler oil provides a much-needed relief

Brent crude oil prices have corrected by 30% since Oct’18, while the INR has bounced back from the lows of INR74 per dollar to ~INR71.6 now. Petrol and diesel prices per liter have also come off from the peak of INR91 and 80.1 to INR75.8 and INR67.7, respectively, in two months in Mumbai. We believe that sustenance of oil prices at current levels can provide a welcome relief for India’s external balance, sentiment and market valuations. In this note, we thus analyze implications of the oil price correction from a macro and micro perspective.

 

Macroeconomic impact: CAD, fiscal deficit and inflation

Crude oil prices have a serious bearing on the key macro variables like current account deficit (CAD), fiscal deficit and inflation. Overall, a USD10/barrel decrease in the price of crude oil pushes down the CAD by ~USD11b, which is equivalent to 0.4% of GDP. Ascertaining the impact of crude oil prices on fiscal deficit is complex as several factors are at play, primarily the level of pass-through of the change in crude oil prices to retail fuel products. Assuming a full pass-through of reduced oil prices to retail fuel prices, a USD10/barrel reduction in the price of crude oil would push down retail petrol and diesel prices by ~INR4/liter. Given the low weightage (2.38%) of fuel components in CPI, even a sharp change in the oil price does not result in significant movements in CPI inflation. However, it impacts WPI inflation numbers significantly: a 10% increase in crude oil price will lead to an impact of ~150-200bp on WPI (including indirect impact).