Crude Oil

Crude oil prices has hovered somewhere close to $110a barrel for past one year, however the price dipped below $100 in the recent past and brought a cheer and sigh of relief for several countries. One of the countries with happy face was definitely India, as it is the largest importer of oil to meet its energy needs. For a country like India which is in the midst of a slowdown, the situation of high food prices and other utilities like fuel is of course a curse. It becomes tough to fight the battle against high prices of essential products for a developing economy which is already facing problem of high fiscal deficit and huge population.

Read about Advantages and Disadvantages of Oil.

Drop in prices of crude coinciding with the softening in prices of other commodities including gold happen to be a boom period for the Indian economy. A ray of new hope came for the policy makers of the economy who are facing a tough time while dealing with poor numbers, reflecting nothing but only negativity.

Slowdown in Chinese economy coupled with sustained recession in the European markets has helped in easing the price of the oil and gas. Increased production of oil and gas in the US despite contraction in global demand did the job well in pulling the prices down. The global macroeconomic factors conspired to trigger a dip in oil prices.

BPCL Refinery

Read about Oil & Gas Companies in India.

Amidst this positive mood, the question of worry is if the current levels can be sustained below the mark of $100. Historically it is seen that the good times does not last long, as happened in June 2012. Crude prices were below the mark of $100 during June 2012, which gave pleasure for only a month. For India, however the nothing better could have happened at this point. The current dip will definitely provide policy makers with levers to bring down deficits (fiscal and current account). Also the dip would result in controlling inflation at consumer level, which in turn will influence interest in favor of investors. Thus investment could see a boost sometime soon which was a much-needed economic revival.

How will Crude Oil Price affect the Financial Deficit, CAD and Interest Rates in the Economy

Fiscal Deficit

Needless to say fiscal deficit has been one of the biggest worries for the country and mainly finance ministry. The quick step to rein in profligacy and increase tax collections seemed to a big failure for the ministry which aimed at reviving the economic development quickly. Large part of government expenditure goes as subsidies on fuel like petroleum, diesel, cooking gas and kerosene. Drop in crude prices at the global level should trickle down to reduced pump prices for the end consumers. This will reduce government’s subsidy burden on fuel thereby helping the finance ministry narrow the widening fiscal gap. Lower crude oil price will help the government cut expenses and the expected expenditure will help in brining the much-needed fiscal discipline.

Current Account Deficit

The story is similar with the current account deficit too. Drop in oil prices will bring down the oil import bill which is currently at staggering 8% of India’s GDP. Cut in the oil import bill coupled with lower price will help bridge the CAD.  It will give a room for the apex bank to modify the monetary policy. Expanding CAD has cuffed RBI from lowering interest rates. With a gloomy scenario in the global economy, it is unlikely that the exports will take a steep pick thus lowering of crude price will only be a saviour in such case which will ease the burden from RBI.

Interest Rates

Lowering of CAD and fiscal deficit will follow a drop in oil prices will act as a boost for market sentiments. It will give room to RBI to provide enough rate cut which will help develop investment climate to a great extent. RBI governor has kept strict vigil on these numbers including inflation will be in position to loosen its stand.

Thus it can be said that the happy days might be here again but again there lies a essence of ‘if’.