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Rising oil prices may not prompt the RBI Governor-headed Monetary Policy Committee (MPC) to go for a rate hike in its June meeting but it can widen the Current Account Deficit (CAD) to 2.5 per cent of the Gross Domestic Product (GDP), a SBI report said on Monday.
The Indian basket of crude oil touched $77.43/barrel (one barrel equals to 159 litres) and is expected to touch $80 soon. This resulted in pushing retail selling price of petrol and diesel to an all-time high of ₹76.57 and ₹67.82 respectively in Delhi on May 21.
Rising fuel prices will also push up inflation which, in turn, can impact policy interest rate. However, the report has a different view at least for the time being. “We refute the current argument of impending rate hike by the RBI on the face of surge in oil prices. We find that oil price as such has not led to countries switching to rate hikes. It is more related to the respective domestic economic developments,” the report authored by Soumya Kanti Ghosh, Group Chief Economic Advisor with the State Bank of India, said.
The MPC is scheduled to meet on June 4-6. Although, many economists and research agencies do not feel that there will be rate hike, some economists and brokerage houses fear that rising oil prices might fuel inflationary expectations prompting the committee to go for rate hike at least by 25 bps.
Current account deficit
“Crude oil prices are expected to impact imports. This will stretch the FY19 current account to 2.5 per cent of GDP. The exports need further push so that the external metrics remain stable,” the report said.
CAD is the difference between inflow and outflow of foreign exchange and it is estimated at 1.9 per cent for 2017-18. It said the crude oil price rise by $17 in the span of a year has been reflected in the imports showing growth of 19.59 per cent.
“Crude oil prices are expected to rise further this year and we expect imports to grow by at least 14 per cent. This will stretch the FY19 Current Account Deficit.”
The report said while mentioning that the worsening of the trade deficit can impact the rupee further. The FII inflows have also not been benevolent this year.
Between April and May outflows to the tune of $5.0 billion have happened. The twin impact of FII outflows and worsening trade balance can hit the rupee further.
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