A recent report by the Union Bank of India (UBI) has highlighted the significant risk posed by the surge in crude prices to India’s current account deficit (CAD). According to the report, every $10 rise in oil prices widens the CAD by $15 billion. This is a cause for concern as India is heavily reliant on imports to meet its oil needs, and a rise in global crude prices can have a substantial impact on the country’s trade balance.
The report notes that India’s CAD, which is the difference between the country’s exports and imports, is highly sensitive to changes in global oil prices. With India importing over 80% of its oil requirements, a rise in crude prices can lead to a significant increase in the country’s import bill. This, in turn, can widen the CAD and put pressure on the Indian rupee.
The UBI report estimates that if crude prices rise by $10 per barrel, India’s CAD can widen by $15 billion. This is a significant increase, considering that India’s CAD was $15.8 billion in the first quarter of the current fiscal year. A widening CAD can have several negative consequences, including a depreciation of the rupee, higher inflation, and a decrease in investor confidence.
The report also notes that the surge in crude prices is driven by a combination of factors, including the Organization of the Petroleum Exporting Countries (OPEC) production cuts, geopolitical tensions, and a decline in global oil inventories. These factors are likely to keep oil prices elevated in the near term, posing a significant risk to India’s CAD.
To mitigate the impact of rising crude prices, the UBI report suggests that the government can consider several measures, including increasing fuel taxes, reducing fuel subsidies, and promoting the use of alternative energy sources. Additionally, the report recommends that the government can also consider diversifying its oil imports to reduce its dependence on any one country or region.
Overall, the UBI report highlights the significant risk posed by the surge in crude prices to India’s CAD and the need for the government to take proactive measures to mitigate its impact. With the country’s oil imports expected to continue growing in the coming years, it is essential for the government to develop a comprehensive strategy to manage the risks associated with rising crude prices and ensure that the country’s CAD remains sustainable.