Daily Management Review

Rise in oil prices overshadows India's economic outlook


08/28/2018


Rising oil prices will increase India's current account deficit, continue to exert pressure on its already weakened currency and affect the prospects for economic growth, CNBC reports.



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Restoring oil prices and India's high demand for it will push up oil imports and increase the country's current account deficit, economists predict.

This growing deficit will lead to a weakening of the rupee, as an increase in imports means that India must buy more foreign currency to meet its needs.

"It is expected that INR (Indian rupee) will continue to face downward pressure during the remainder of 2018, reflecting several factors, including further increases in US Federal Reserve rates, an increase in India's current account deficit and negative sentiment of investors over currencies and assets developing countries, "said Rajiv Biswas, IHS Markit's chief economist for the Asia-Pacific region, CNBC.

According to his forecasts, the rate of the rupee will fall to 72 per dollar by the end of 2018 and will reach 74 per dollar by August 2019. 

"The difficult global conditions forced the Reserve Bank of India to actively intervene this year to contain the weakening of the rupee... The reduction in foreign exchange reserves was significant," DBS analysts said.

Wood Mackenzie predicts that India by 2024 will become the world's largest consumer of oil, ahead of China.

India's demand for oil is expected to grow by 3.5 million barrels per day between 2017 and 2035. Thus, the country will account for more than 30% of the world growth in oil demand, said Director of Research at Wood Mackenzie.

"The steady growth in per capita consumption has strengthened the position of [India] as one of the world's largest oil importers, making the economy vulnerable to fluctuations in world oil prices," the Oxford Economics report said.

"India needs to reduce demand for oil and, in turn, imports, to make [economic] growth more resilient to higher oil prices, but we think this is unlikely in the next ten years," the report says.

source: cnbc.com






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