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Oil price surge will push India’s CAD up to 2.5% of GDP: SBI

Mumbai, May 21: Even though oil is now considered less of an independent driver of business cycles than before, the State Bank of India (SBI) on Monday said the recent surge in crude oil prices is likely to impact the country’s imports and stretch the ongoing fiscal’s current account deficit (CAD) to 2.5 per cent of GDP.

In an SBI Ecowrap report, titled “Oil on boil: It’s time we understand oilnomics better”, Chief Economist Soumya Kanti Ghosh argues that its estimate that a $10 per barrel (bbl) increase in oil price will increase India’s import bill by around $8 billion is a “model estimate and actuals could be much different from them”. Transport fuel prices in Delhi crossed previous highs on Monday. Petrol per litre in Delhi under the dynamic pricing regime touched a record high of Rs 76.57, having already beaten on Sunday the previous high of Rs 76.06 in the city on September 14, 2013. Diesel went to its highest level of Rs 67.57 per litre.

“Our model estimates suggest that $10/bbl increase in oil price will increase import bill by around $8 billion. This in turn will decrease GDP by 16 basis points (bps), increase fiscal deficit by 8 bps, CAD by 27 bps and inflation by 30 bps,” the report said.

“However, we maintain these are model estimates and actuals could be much different from them. For example, since June 2017, oil price has increased by $23/bbl, but the direct and indirect impact on CPI has only been 26 bps.” Ghosh said: “On the whole, we believe that oil is now thought to be less of an independent driver of business cycles than was previously believed. For example, when oil prices collapsed post 2014 global growth did not pick-up materially.” Ghosh also refuted the argument of an impending rate hike by the Reserve Bank of India (RBI) on the face of the surge in oil prices. (IANS)

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Ankur Kalita