Active Stocks
Thu Mar 28 2024 15:59:33
  1. Tata Steel share price
  2. 155.90 2.00%
  1. ICICI Bank share price
  2. 1,095.75 1.08%
  1. HDFC Bank share price
  2. 1,448.20 0.52%
  1. ITC share price
  2. 428.55 0.13%
  1. Power Grid Corporation Of India share price
  2. 277.05 2.21%
Business News/ Market / Mark-to-market/  IMF estimates higher crude oil prices may not have any significant impact on India’s GDP
BackBack

IMF estimates higher crude oil prices may not have any significant impact on India’s GDP

IMF says India's terms-of-trade loss as a percent of GDP over 2018-2019 is likely to be at 0.18%, much lower than the 1.5% loss seen in 2017

Overall oil demand is expected to rise with global growth. Oil prices therefore should have enough support.Premium
Overall oil demand is expected to rise with global growth. Oil prices therefore should have enough support.

According to the International Monetary Fund (IMF), the impact of higher oil prices on India’s gross domestic product may not be all that much this year and the next.

Consider the accompanying Chart 1, taken from IMF’s recently published World Economic Outlook. It shows India’s terms-of-trade loss as a percent of GDP over 2018-2019 at 0.18%, much lower than the 1.5% loss seen in 2017. The loss, of course, is due to a rise in oil prices. Conversely, when oil prices fell in 2015 and 2016, India had large windfall gains of around 4% of GDP.

IMF estimates dated Brent crude oil price to average $64.6 a barrel for 2018, up 19% over 2017. Many seem to be working with similar price assumptions. Kotak Institutional Equities’ estimates for calendar year 2018 are 20% higher year-on-year (Chart 2). The Reserve Bank of India’s (RBI) baseline scenario assumes crude oil prices (Indian basket) to average around $68 a barrel in FY2019.

The question is: is the assumption of Brent averaging around $65 a barrel too low? With Brent prices hovering around $75 a barrel and a lacklustre supply outlook, it’s quite possible that oil price estimates may be revised upwards. “We do see further upside in the near term from possibility of (1) curtailment of Iran crude exports if the US decides to restore sanctions by May 12, (2) further supply shocks from enduring issues in Venezuela and Libya and (3) midstream bottlenecks that may restrain growth in the US/Canada production," said Kotak analysts in a report on 23 April.

What’s more, US shale oil may not play a major role in keeping a check on prices this time around. Schlumberger CEO Paul Kibsgaard said last week production challenges in US shale are emerging in the form of significant infrastructure constraints and those linked to infill drilling well-to-well interference. “It is, therefore, becoming increasingly likely that the industry will face growing supply challenges over the coming year and a significant increase in global E&P investment will be required to minimize the impending deficit," added Kibsgaard.

Further, overall oil demand is expected to rise with global growth. Oil prices therefore should have enough support.

There is another threat—the fear of inflation. Given the sharp increase in crude oil prices, Deutsche Bank Research now expects the rate hike cycle to be brought forward. “We now see RBI hiking the repo rate by 25bps in June itself (to 6.25%), reversing the 25bps rate cut of August last year, and likely hiking another 25bps by the end of this calendar year or early next year," said Kaushik Das, chief economist, Deutsche Bank in a note on 24 April.

All of which underlines the need for investors to adopt caution as their watchword, despite the IMF estimates.

Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!

ABOUT THE AUTHOR
Pallavi Pengonda
Pallavi is a deputy editor at Mint and heads the Mark to Market team. This column covers wide-ranging topics related to the stock markets, offering an in-depth analysis of financial reports of companies. She writes and edits across verticals, covering the breadth of the Indian stock market. Pallavi has done her master of management studies, specializing in finance.
Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
More Less
Published: 26 Apr 2018, 08:01 AM IST
Next Story footLogo
Recommended For You
Switch to the Mint app for fast and personalized news - Get App