Brent crude, hovering around $113 per barrel in June, fell sharply and on Friday and was trading at $97-level following healthy supply, dip in consumption growth in key markets such as China and also a cut in global demand forecast by the International Energy Agency.
The price dip is crucial for India, which would show up positively on four fronts: exchange rate, inflation, current account and fiscal deficits, and investor sentiment.
Global crude price reduction and domestic diesel price hike have led to a decline in combined daily under-recovery of oil marketing companies from Rs 230 crore for fortnight ended August 31 to Rs 195 crore for the fortnight effective September 1.
“Every $1 decline in crude prices brings down the current account deficit by about $1bn. The nearly $10 per barrel decline can therefore drive a substantial improvement in the current account,” said Neelkanth Mishra, India equity strategist at Credit Suisse.
The development will also give much needed comfort to the finance ministry as the Centre tries to meet the fiscal deficit target of 4.1 per cent in 2014-15.
“The fiscal deficit target seems much more achievable now than at the start of the year. While revenue from disinvestment will give a boost to the finances, on the expenditure side, savings from lower crude oil prices could help bring down the fuel subsidy bill,” said a government official.
The Union Budget had allocated Rs 63,427 crore as fuel subsidy in 2014-15. But over the last two months, global crude oil prices have been much lower.
For calculating the Budget Estimates, the finance ministry has taken global crude oil prices at $110 per barrel and the exchange rate at Rs 61 to the dollar.
“The current trend of oil prices and a decline in the Asian Premium will have a beneficial impact on GDP and investor outlook,” said Nilesh Shah, CEO, Axis Capital.
The inflation too is expected to witness some softening and that may help RBI’s ability to go for cut in the interest rates. “As underlying the price of every item like labour and energy costs, and petrol and diesel prices in India are now as per the market price of crude, the fall in oil can also impact inflation over 4-5 months,” said Mishra.