Price rise hits CAD, higher GDP growth won’t help: RBI study

An increase in international crude oil price by $10 will impact headline inflation by 49-58 basis points, researchers of the Reserve Bank of India said.

“Under the most conservative estimate, we quantify that a $10/barrel increase in crude price at the price of $65/barrel will lead to a 49 bps increase in headline inflation,” the researchers said in a paper ‘The Impact of Crude Price Shock on India’s Current Account Deficit, Inflation and Fiscal Deficit’.

A similar increase at $55/barrel gives around a 58 bps increase in headline inflation.

“If the government decides upon a zero pass-through to the final consumers, a $10/barrel increase in the crude prices could increase the fiscal deficit by 43 bps. This zero pass-through scenario thus allows us to put an upper bound on the amount of fiscal slippage,” it said.

International crude oil prices increased by around 12% between April and September 2018, mainly due to a spurt in demand, on the back of global growth revival, and partly due to geopolitical risks that led to supply-side shocks.

However, since mid-November 2018, crude prices have declined significantly, but remain volatile.

The paper also argues that an increase in crude price worsens the Current Account Deficit (CAD) for India and this adverse impact cannot be significantly contained through a higher Gross Domestic Product (GDP) growth.

“So, a crude price shock will be followed by high CAD to GDP ratio,” it added.