Brent crude rose to an intra-day high of $74.31 per barrel on Monday, and was trading at $73.7 per barrel, up $1.7 or 2.4%, from its previous closing. The Indian rupee fell 31 paise against the dollar, and was trading at $69.67. A rise in the price of crude oil hurts the economy because crude accounts for a significant portion of India’s overall imports. If crude rises further, it will not only impact the stability of the rupee and the rise in stock markets, but may also produce an inflationary effect.
What is leading to the rise in the price of Brent crude?
The spike in prices on Monday followed reports that the United States will stop granting sanction waivers to any country importing Iranian crude or condensate beginning May 2, 2019. While the spike in prices was on account of this report, crude oil prices have been rising steadily since March on concerns over supply from OPEC, and the US sanctions on Venezuela. Over the last two months, Brent crude prices have risen 14.7% from a level of $64.76 per barrel on February 25 to $74.31 on Monday. Monday’s prices were the highest in nearly six months. Brent crude closed at $75.47 per barrel on October 31, 2018.
What is the impact on the rupee? Could it weaken further?
Inflow of funds from foreign portfolio investors led to a strong recovery in the rupee between January and March 2019. However, the rupee has been rising against the dollar since the reversal in the trend of crude prices. If Brent continues to rise, the rupee is likely to face additional pressure. While expectations of weakening global growth may temper its rise, the news of the end of waivers for the Iran sanctions has spooked the market.
Crude has traditionally been a big determinant of the way the rupee moves. In October 2018, the rupee fell to an all-time low of 74.34 against the dollar in line with rising oil prices. Brent crude had hit a level of $86 per barrel in October, putting pressure on the rupee and on India’s current account deficit. However, as crude prices declined over the following months to levels of around $52 per barrel by the end of December 2018, it offered relief to both the rupee and the economy.
A weak rupee hurts the country on account of the higher import bill and current account deficit, and also tends to be inflationary. The Reserve Bank of India will be watching the movement of crude and domestic inflation before going for another rate cut this year.
Does the US decision on Iran hurt India’s imports?
In the 10-month period between April 2018 and January 2019, India imported $97 billion worth of petroleum oil and oil obtained from bituminous minerals crude. Almost 11.2 per cent of petroleum oil, worth $10.9 billion, were imported from Iran. The US decision to end waivers for countries importing crude from Iran beginning May 2 may hurt India’s interests, as it will have to look for alternative sources of oil. The US sanctions on Venezuela are already restrictive for India. From April 2018 to January 2019, India imported almost 6.4% of its requirement from Venezuela. If both countries are now pushed out of India’s equation, almost 17.6% of its total imports will be impacted. Also, if the total supplies from these two big oil exporters is kept out of the market, it will lead to a supply crunch, and likely increase in overall crude oil prices.
What are the other sources of crude oil for India?
While Iraq is the biggest exporter, Saudi Arabia is a close second, and both of them account for 38% of India’s total petroleum imports. UAE and Nigeria together account for 16.7%. However, the biggest change has been the entry of the US as a major player. While it did not figure in the list of top 10 petroleum exporters for India in 2017-18, in the 10 months of FY’19, the US stood at number 9 with an over 3% share of India’s petroleum imports.