Economy News

Crude at $100 may push retail inflation by 60 bps, delay rate cut

Costlier crude to inflate oil import bull by $3-bn, fertiliser subsidy by 5%

The chances of Brent crude price touching $100-a-barrel in the backdrop of an escalation of the tensions in west Asia and remaining in at that level in the near term, could seriously alter key macro-indicators. According to FE analysis and estimates by economists, crude at $100 could push up CPI inflation by 60 basis points (bps) from the RBI estimate which pegged oil at $85, assuming full pass-through to retail consumers of auto fuels. It could also inflate oil import bill by $ 2.5-3 billion, and increase fertiliser subsidy for FY25 by at least 5% from the budget estimate of Rs 1.64 trillion.

Oil around $100 could likely delay the beginning of the rate cut cycle by the Reserve Bank of India (RBI). “If crude oil prices sustains higher than $100/bbl, it can delay monetary policy easing beyond Q3 FY25, easily,” said Dhiraj Nim, economist, ANZ Banking Group. At present, however, the price of Brent crude is $90/bbl, and that of India’s crude oil basket is $91.20/bbl.

Gnanasekar Thiagaranjan, director, Commtrendz Research, said: “For near term to short term, there is a likelihood that crude oil price may be near $100/bbl at least.” “Brent is already at $90/bbl, but WTI crude is at $85/bbl. So WTI going up by another $10/bbl looks very likely; not just because of the war development but also because supply is being curtailed consciously. All this will most likely take us near $95/bbl or close to $100/bbl,” he said.

A $100/bbl price of crude, or rather India’s crude oil basket, lead to rise in inflation, decline in growth, and widening of both current account deficit (CAD) and fiscal deficit, say economists.

The RBI has projected CPI inflation and GDP growth to average 4.5% and 7%, respectively, in FY25. But this is based on the assumption of India’s crude oil basket price averaging $85/bbl in the current fiscal.

In case, the crude price rises by 10% over the baseline, retail inflation may rise by 30 basis points (bps), and growth may decline by 15 bps. The current account deficit may widen by 30 bps, and fiscal deficit may expand by 40 bps, say economists. For FY25, the CAD is projected at around 1-1.2% of the GDP, and fiscal deficit at 5.1%.

Since crude is not only linked to pump prices of auto fuels but also to naptha, gas and other industrial feeds, its price rise affects a broad range of products in the petrochem-to-plastics value chain, fertilisers like urea, metals and so forth. India imports 20% of its urea requirement, and since the prices of this commonly used fertiliser at the retail levels are fixed, higher costs could jack up the fertiliser subsidy.

Madan Sabnavis, chief economist, Bank of Baroda said that a $100/bbl crude will push up the import bill by $ 2.5-3 billion assuming full passage of higher cost.

In FY24, the price of India’s crude basket had averaged $82.5/bbl. Retail inflation during the year averaged 5.4%, and GDP growth 7.6% (as per NSO’s second advance estimate). CAD likely averaged in the range of 0.8-0.9% of the GDP, and fiscal deficit came in at 5.8%, as projected in the interim Budget’s revised estimate.

Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership said: “If Indian crude basket price averages $100/bbl in this fiscal versus $82/bbl in FY24, inflation should then be higher by around 60 bps (5.1%) while GDP growth should be lower by 30 bps (6.7%), ceteris paribus.”

“However, the impact on inflation could differ depending on the degree of pass-through to retail prices,” he said.

Experts widely believe that the pass-through of high crude oil prices to retail prices will not take at least till the elections are over, but post polls oil-marketing companies shall do so.

“Every $1 increase in crude prices reduces margins by 30-40 paisa per litre,” said an analyst, who doesn’t want to be identified. “Because of the price reduction and in the run up to the elections, they (OMCs) may be exposed to (rising) oil prices but once elections are over, there could also be price hikes,” the analyst said.

Source:financialexpress.com

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