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24-Apr2019

Spike in crude prices may adversely impact CAD, rupee, inflation: Care Ratings

Credit rating agency Care Ratings in its latest report has warned that a spike in crude oil prices by 10 percent owing to the US sanctions on Iranian crude exports can result in a 0.40 percent widening of the current account deficit (CAD), which can subsequently play out into a 3-4 percent fall in the rupee and also push up inflation by 0.24 percent. It also said that Iran is India's third largest supplier and meets a tenth of India's crude demand and the immediate challenge is to find alternate suppliers who will be able to deliver India at competitive prices as Tehran offers after May 2.

According to the report, if the crude prices remain around $75 a barrel for another month, the Reserve Bank of India's (RBI's) monetary policy committee (MPC) may postpone a rate cut in the June bi-monthly committee meetings. It pointed out that rising crude prices can have a two-way impact on the domestic economy, which will play out on both the revenue and expenditure fronts. It added that while higher oil prices will mean more revenue for the states as tax is ad valorem, but for the Centre, it may not matter as the rates are fixed.

Rating agency further said that oil marketing companies would earn higher profits if there is a pass-through which can be beneficial for the government too unless the subsidy on kerosene comes in the way. With the US-directed sanctions kicking off from May 2, it would be interesting to see how the various macroeconomic indicators of the domestic economy change course owing to increase in crude prices.


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