Crude oil prices are set to decline further, with the Organization of the Petroleum Exporting Countries (Opec) deciding to maintain output at 30 million barrels per day, resisting calls from Venezuela that the group stem the slide in prices.
Minutes after the announcement, Brent crude slipped by $ 3 to $ 74.75 a barrel. Analysts now expect prices to inch closer to $ 65 a barrel. The Opec move is good news for emerging economies, such as India, which have seen deficits spiral with their oil import bills ballooning over the past few years.
India, which has been battling high inflation for several years, is heading for happier times from a macroeconomic point of view, as the inflation target set by the Reserve Bank of India can now be easily met. The central bank was earlier factoring in oil at around $ 100 a barrel. The 21 per cent decline in price from that level would help lower inflation. For every $ 10 a barrel fall in crude oil prices, the current account deficit can narrow by 40-50 basis points.
Barclays India economist Siddhartha Sanyal says: “Given that petrol and diesel prices are now determined by market, the fall in import costs will have an immediate impact on inflation. We are looking at retail inflation averaging around six per cent in 2015; that is significantly lower than the long-term average of 7.3 per cent. This is also true for the wholesale inflation rate, which can in 2015 average about 100 basis points lower than the long-term average. For the current account deficit, our estimate is $ 32 billion, or about 1.6 per cent of gross domestic product.”
Others said India’s import bill could meaningfully decline, helping Finance Minister Arun Jaitley meet his fiscal deficit target of 4.1 per cent of GDP. In fact, economists believe the fiscal deficit could contract to 3.9 per cent of GDP after Thursday’s Opec decision.
Indranil Sen Gupta, India economist at Bank of America Merrill Lynch, says: “Lower crude oil prices obviously improve India’s macro conditions. A five per cent decline in petrol and diesel prices bring Consumer Price Index-based inflation down by 45 basis points.” He estimates fiscal deficit at 4.1 per cent of GDP in 2014-15 and 3.6 per cent the next year. Bank of America Merrill Lynch expects crude oil prices to average $ 96 a barrel in 2014-15 and $ 91 a barrel in 2015-16.
But weak oil prices are not so positive for upstream oil companies like Cairn India. Oil producers realisations will come under pressure if global crude oil prices continue to weaken. Chirag Dhifule of LKP Securities says any upside in crude oil prices would be positive for Cairn India and ONGC. Given that the production has not been lowered, it is a positive for state-run oil marketing companies. The subsidy burden would not return, given that both petrol and diesel prices do not factor in any subsidy at current prices.
For this reason, the fall in inflation will be sharper in coming months, as imported inflation has significantly moderated with oil prices declining and rupee remaining stable despite the unwinding of the quantitative easing programme of the US Federal Reserve. The outlook for India continues to improve with this latest move of Opec.