Oil importing Indian economy sighs huge relief as Brend Crude falls below USD 50 per barrel

The news comes as a positive development for major oil importing countries like India and South Africa who are heavily dependent on imports for meeting their whopping oil demands.

Brent Crude (Image: PTI)

New Delhi: Brent crude prices plunged below USD 50 per barrel on Wednesday, recording a 16-month low since July 2017. Brent Crude which was trading at around 85 per barrel in early October has witnessed a sharp decline of almost 70 percent amid fears of a global economic slowdown. The news comes as a positive development for major oil importing countries like India and South Africa who are heavily dependent on imports for meeting their whopping oil demands. On the contrary, major oil exporting nations like South Africa and will have a detrimental effect on their export margins due to the falling crude price. The bearish trends in crude oil prices has seen global currencies gaining strength on the stock exchanges of oil deficit nations. India would sigh a huge relief as its extra fuel subsidy bill could prove to be lower than recent estimates and the current account deficit (CAD) for FY19 could be a few billion dollars less than reckoned earlier. If one were to do some macro economic analysis, every $10-per-barrel fall in oil prices boosts incomes by about 0.5 to 0.7 per cent of gross domestic product in major emerging market oil importers, Capital Economics analysts estimate. The rupee gained in early trade against the dollar after brent crude fell to $50 per barrel. The Indian currency was trading at 69.94, 20 paise higher than Monday's close of 70.14 against the US dollar. The rupee is down 9.51 percent since the beginning of this year. "We remain bullish on the rupee in the current stage not only because of oil prices but also because of RBI's (Reserve Bank of India) open market operations that inject additional liquidity," Qi Gao, Asia FX strategist at Scotiabank in Singapore said Since the beginning of FY19, crude prices have witnessed a dip due to the wider financial market weakness as higher US interest rates and the US-China trade dispute created a panic mode among strategic investors and exacerbated worries over global growth. In October 2018, the price had surged to an all time high of $86.29 per barrel, forcing the Union Govt to cut excise duty by Rs 1.50 per litre. Public sector oil marketing companies (OMCs) also began absorbing Rs 1 on every litre of petrol and diesel they sell. The steps were aimed at giving some relief to consumers. “The significant moderation in oil prices observed lately may give a succour to the rising subsidy bill and the additional subsidy burden might be restricted to Rs 11,720 crore, taking the total petroleum subsidy to around Rs 36,353 crore against the budget estimate (BE) of Rs 24,932 crore,” SBI Research said in a recent report. Rupee depreciation and under-recoveries of oil marketing companies have exerted pressure on the fiscal deficit target of 3.3% of GDP for FY19. In October when crude oil prices hit record high, the ministry of petroleum and natural gas had estimated that fuel subsidy outgo for FY19 could be Rs 47,000 crore, an increase of 88% from the budgeted level. The Indian basket of crude oil price averaged a little over $73/barrel so far in FY19, as against the average of $56.39 in FY18. Indian crude oil basket has come down from the average of $80.08 par barrel in October to $65.40 in November this year.