CAD to widen with Indian basket of crude pricier by $10 at $94/bbl

With the Indian basket of crude oil touching $112 a barrel on March 2, the current account deficit (CAD) is expected to widen further.

The average price of the Indian basket in February surged to over $94 a barrel, a jump of nearly $10 a barrel. Various analysts suggest that on an average a $5 increase in crude prices translates into CAD widening by over $6.5 billion. Higher deficit will weaken the rupee, further aggravating the situation.

The Indian basket of crude oil comprises Sour grade (Oman and Dubai average) and Sweet grade (Brent Dated) processed in Indian refineries in the ratio of around 75 and 25 per cent, respectively. Since India imports nearly 85 per cent of its crude requirement, any increase in the buying price will push up the CAD. This means India will need to pay out more dollars than it receives from abroad.

According toao last published data by Reserve Bank of India, the country’s current account balance recorded a deficit of $ 9.6 billion or 1.3 per cent of GDP in July-September quarter (Q2) of FY2021-22 against a surplus of $ 6.6 billion or 0.9 per cent of GDP in previous quarter and $15.3 billion or 2.4 per cent of GDP in the corresponding quarter of last fiscal.

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The average crude price in Q2 was was $72.15, which rose to $78.68 in Q3 (October-December) and now in just two months of Q4 (January-March) jumped to over $89 and is expected to touch $100.

Aditi Nayar, Chief Economist with ICRA said she expects CAD at $24-28 billion in Q3, with a mild moderation in Q4, as the January-February trade deficit is tracking modestly below the October-November 2021 levels.  “We expect the CAD to widen by $14-15 billion (0.4 per cent of GDP) for every $10/bbl increase in the average price of the Indian crude oil basket. If the ongoing geopolitical tensions between Ukraine and Russia push up the average price of the Indian crude oil basket in FY2023 to $100/bbl, then the CAD is projected to widen to $85-90 billion (2.4 per cent of GDP), close to the absolute level in FY2013 (albeit a much higher 4.8 per cent of GDP),” Nayar said.  

In a research note, Sonal Verma and Aurodeep Nandi of Nomura said oil imports mainly driving the larger trade deficit in February suggests the ongoing Russia-Ukraine conflict could affect imports through the price channel and possibly exports through the volume channel. “We estimate a 10 per cent rise in global crude oil prices would widen India’s current account deficit by 0.3 per cent of GDP. Given the lag between spot oil prices and the signing of new oil contracts, we should see the full effect of the current rise in oil prices in the April/May trade data,” the note said.

Another research note by Paras Jasrai and Sunil Kumar Sinha of India Ratings and Research (Ind-Ra) said the immediate impact of the conflict on the Indian economy will be felt through inflation, an increase in current account deficit and rupee depreciation. “Ind-Ra’s analysis suggests that a $5/barrel (bbl) increase in crude oil prices will translate into an $6.6 billion increase in trade/current account deficit,” it said.

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