India would be a clear-cut loser if crude oil continues to rise: Nomura


Crude Brent has risen this year from a trough of USD 44/bbl in June to USD 63/bbl, and while this pales in comparison to the drop from USD115/bbl to USD 45/bbl over June 2014 to January 2015, in percentage growth terms it is still a large rise of 43 percent, said a Nomura report.

It is difficult to disentangle how much of this is due to increased demand from, for example, the synchronised global growth upswing, limits on supply, such as OPEC stringently sticking to production quotas and the recent decline in US shale rig count, or indeed other factors like heightened geopolitical uncertainty in the Middle East.

The economic impact is also hard to gauge, as it depends not only on the size but also on the duration of the oil price rise. However, what became clear from the oil price plunge in H2 2014 was how it drove a divide in the emerging market (EM) universe, favouring commodity importers (notably in Asia and parts of EEMEA) at the expense of large commodity exporters (from Latin America and the Middle East, and Russia). Now, with oil prices reversing, the shoe is on the other foot.

Don’t expect any more rate cuts by the RBI going ahead; see some pickup in inflation: Ambit Capital
Expect crude oil to trade positive: Sushil Finance
Crude oil prices to trade higher: Angel Commodities
The global investment bank revaluates important factors in considering EM differentiation if the oil price rise is sustained. After considering the starting positions of each country’s economic fundamentals, scope for policy responses and other idiosyncratic factors in a world of significantly higher oil prices in 2018, we would classify the EM universe as follows:

Clear-cut winners: Colombia, Malaysia, Nigeria, Russia and Saudi Arabia.

Winners: Brazil, Venezuela.

Neutral: Czech Republic, Hong Kong, Hungary, Israel, South Korea, Mexico, Poland, Romania, Singapore and Taiwan.

Losers: Argentina, Chile, China, Egypt, Indonesia, Peru, South Africa, Thailand.

Clear-cut losers: India, the Philippines, and Turkey.

For India which falls under the clear-cut loser category could see further fall in GDP growth rate thanks to rising crude oil prices. India imports more than 70 percent of its oil needs and hence higher oil prices are tantamount to a negative terms-of-trade shock that weakens growth, push up inflation and deteriorates the twin deficits.

Every USD 10/bbl rise in oil price could reduce GDP growth by around 0.15pp, widen the current account balance by 0.4 percent of GDP, widen the fiscal balance by 0.1 percent of GDP and add ~30-35bp to headline CPI inflation.

Furthermore, policy space to accommodate an oil price shock is limited. “We expect CPI inflation to head above the Reserve Bank of India’s (RBI) target of 4 percent in 2018 and hence the RBI to stay on hold through 2018, with the risk of a hawkish tilt if higher oil prices start to feed into core inflation and inflation expectations,” said the note.

The government could also make an effort to cushion the burden on consumers by lowering the fuel excise duty, but this would adversely affect tax revenue collections.

Every Re 1/litre reduction in the fuel excise duty would lower excise collections by Rs 130 billion (0.08 percent of GDP) annually.

However, Nomura is of the view that India’s fundamentals have improved materially since 2013 with much lower inflation and a current account deficit that is largely funded by higher net FDI inflows.