ASCENT · because India imports more than 75% of its crude requirements. In 2013-14, the oil import...
1
The price of the Indian basket of crude has fallen from Rs.105.3 in January 2014 to Rs.67.9 in December, a decline of 35%. This development has benefitted the Indian economy more than any reform measure implemented this year. Declining crude prices impact the economy in five ways. v First, the price of crude oil is one of the biggest drivers of the trade deficit because India imports more than 75% of its crude requirements. In 2013-14, the oil import bill was $150 million, or one-third of total imports. Lower crude prices reduce the value of crude imports, which, in turn, leads to a lower current account deficit. In 2014-15, the current account deficit is expected to be contained within 2% of GDP, largely due to favourable crude prices. India has always relied on foreign capital inflows to fund its chronic current account deficits; hence maintaining a low deficit is critical for external stability. Second, falling crude prices translate to lower inflation. The direct impact of a lower crude price is like a tax cut: people need to spend less on buying crude products, so they have more disposable income available to spend on other goods and services. Inflation indices directly assign a weight of about 10% to crude products, but the net impact of falling crude prices is much higher because of secondary effects such as reduced transportation costs or lower prices of industrial products. With the deregulation of diesel and petrol prices, the pass-through from import prices to domestic inflation has become more significant. Falling crude prices have also brought down inflation expectations; thus making it easier for RBI to ease monetary policy. Third, falling crude prices have reduced the subsidies to be paid on LPG and kerosene. In 2013-14, fuel subsidies cost Rs. 854.8 billion. The budgeted estimate of Rs.634.3 billion for 2014-15 was based on a price of $100-$110 per barrel; with prices already well below that, there will be potentially huge savings in subsidy payments. Lower subsidies imply a lower fiscal deficit. In the last two years rising crude prices have made it difficult for the government to reach its fiscal deficit target; this year falling crude prices are enabling it! Fourth, interest rates on government securities have declined at the prospect of lower fiscal deficits and, consequently, lesser government borrowing. Ten year benchmark g-sec rates have given up over 90 basis points this year: dropping from about 9% in January to 8.1% in December. While some of this decline should be attributed to better liquidity and the likelihood of monetary easing, the main impetus has come from the recognition that the government will have to spend far less on fuel subsidies this year. This has strengthened the case for a rate cut, which is now expected in 2015. Finally, the exchange rate has remained remarkably stable, reflecting the improved macro-economic position. In 2013, a rising current account deficit and sudden outflows of foreign capital pushed the rupee to less than Rs.65 to a dollar; but this year, the rate has stabilized at Rs.61-62 per dollar. The absence of volatility in the forex markets reflects a stable external account and stronger fiscal position. The slump in crude prices has favourably impacted the Indian economy through various channels. In the process, it has created a window of opportunity for the government to implement structural reforms without the worries of managing short term macroeconomic crises. ASCENT The Impact of Decling Crude Prices DEC 19th, 2014 Sunita Abraham Uma Shashikant All rights reserved. No part of content may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission in writing from Centre for Investment Education and Learning (CIEL). The structure, outline, approach, t, framework and materials in this newsletter by CIEL shall be and remain along with all intellectual property rights therein or related thereto] the exclusive property of CIEL. Source: Ciel Research Crude Supply Shock Organization of the Petroleum Exporting Countries (OPEC) is a cartel of oil-producing nations that pumps out about 40% of the world's oil. Thanks to the ‘shale-oil revolution’, the US has ramped up oil production and emerged as the main non-OPEC contributor. As a result, supply of non-OPEC oil has been rising. In the past, OPEC has tried to influence the price of oil by coordinating either to cut back or boost production. But now it is having to compete much more actively on price with such non-OPEC producers in order to maintain market share. It is being touted as ‘price war’, with both sides refusing to cut production so far! Price of the Indian Basket of Crude ($/bbl)
Transcript of ASCENT · because India imports more than 75% of its crude requirements. In 2013-14, the oil import...
The price of the Indian basket of crude has fallen from Rs.105.3 in January 2014 to Rs.67.9 in December, a decline of 35%. This development has benefitted the Indian economy more than any reform measure implemented this year. Declining crude prices impact the economy in five ways.
v
First, the price of crude oil is one of the biggest drivers of the trade deficit because India imports more than 75% of its crude requirements. In 2013-14, the oil import bill was $150 million, or one-third of total imports. Lower crude prices reduce the value of crude imports, which, in turn, leads to a lower current account deficit. In 2014-15, the current account deficit is expected to be contained within 2% of GDP, largely due to favourable crude prices. India has always relied on foreign capital inflows to fund its chronic current account deficits; hence maintaining a low deficit is critical for external stability. Second, falling crude prices translate to lower inflation. The direct impact of a lower crude price is like a tax cut: people need to spend less on buying crude products, so they have more disposable income available to spend on other goods and services. Inflation indices directly assign a weight of about 10% to crude products, but the net impact of falling crude prices is much higher because of secondary effects such as reduced transportation costs or lower prices of
industrial products. With the deregulation of diesel and petrol prices, the pass-through from import prices to domestic inflation has become more significant. Falling crude prices have also brought down inflation expectations; thus making it easier for RBI to ease monetary policy.
Third, falling crude prices have reduced the subsidies to be paid on LPG and kerosene. In 2013-14, fuel subsidies cost Rs. 854.8 billion. The budgeted estimate of Rs.634.3 billion for 2014-15 was based on a price of $100-$110 per barrel; with prices already well below that, there will be potentially huge savings in subsidy payments. Lower subsidies imply a lower fiscal deficit. In the last two years rising crude prices have made it difficult for the government to reach its fiscal deficit target; this year falling crude prices are enabling it!
Fourth, interest rates on government securities have declined at the prospect of lower fiscal deficits and, consequently, lesser government borrowing. Ten year benchmark g-sec rates have given up over 90 basis points this year: dropping from about 9% in January to 8.1% in December. While some of this decline should be attributed to better liquidity and the likelihood of monetary easing, the main impetus has come from the recognition that the government will have to spend far less on fuel subsidies this year. This has strengthened the case for a rate cut, which is now expected in 2015.
Finally, the exchange rate has remained remarkably stable, reflecting the improved macro-economic position. In 2013, a rising current account deficit and sudden outflows of foreign capital pushed the rupee to less than Rs.65 to a dollar; but this year, the rate has stabilized at Rs.61-62 per dollar. The absence of volatility in the forex markets reflects a stable external account and stronger fiscal position.
The slump in crude prices has favourably impacted the Indian economy through various channels. In the process, it has created a window of opportunity for the government to implement structural reforms without the worries of managing short term macroeconomic crises.
ASCENTThe Impact of Decling Crude Prices
DEC 19th, 2014Sunita AbrahamUma Shashikant
All rights reserved. No part of content may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior permission in writing from Centre for Investment Education and Learning (CIEL). The structure, outline, approach, t, framework and materials in this newsletter by CIEL shall be and remain along with all intellectual property rights therein or related thereto] the exclusive property of CIEL.
Source: Ciel Research
Crude Supply Shock
Organization of the Petroleum Exporting Countries (OPEC) is a cartel of oil-producing nations that pumps out about 40% of the world's oil. Thanks to the ‘shale-oil revolution’, the US has ramped up oil production and emerged as the main non-OPEC contributor. As a result, supply of non-OPEC oil has been rising. In the past, OPEC has tried to influence the price of oil by coordinating either to cut back or boost production. But now it is having to compete much more actively on price with such non-OPEC producers in order to maintain market share. It is being touted as ‘price war’, with both sides refusing to cut production so far!
Price of the Indian Basket of Crude ($/bbl)
