A combination of elevated crude oil price and weak rupee, if sustained for more than a quarter, will have an adverse impact on Indias current account position, inflation, monetary policy stance and fiscal balance, India Ratings and Research (Ind-Ra) said in a report.The rating agency said that if crude basket averages $68-72.86 a barrell and rupee averages 66.6-67 for every dollar for FY19, the current account deficit could widen $22 billion-31 billion for the year.
Wholesale inflation could also increase 70-80 basis points from the agencys current forecast of 3.4 per cent and retail inflation 30-35 bps from its current forecast of 4.3 per cent.The value added tax imposed by the states is on ad valorem basis.
Therefore, with a rise in oil prices, the state governments garner higher revenue from the sale of same quantity of oil as opposed to the central government whose excise duty is fixed in terms of INR/litre.
A surge in crude oil prices, therefore, gives the state governments more headroom to rationalise the tax rate without compromising much on their fiscal arithmetic, the report said.India is the third largest importer of oil in the world and aims to import dependency in oil and gas by 10 per cent by 2022.But the agency believes that the crude oil prices will correct from the present high of around $78 a barrel due to increased US shale production.
Elevated crude oil prices are not in the best interest of oil producing countries as well, because it aggravates the risks of jeopardising the ongoing global recovery.
Ind-Ras base case macro-economic forecast is based on average Brent crude at $70/barrel in FY19.
This corresponds to Indian crude basket of approximately $68/barrel.