How Oil Impacts India's Balance Of Payments?

Amid supply chain disruptions and increasing volatility in oil prices triggered by the Israel-Iran-US war, India continues to be a net importer of oil, consuming nearly 5.3–5.5 mbpd, while the domestic production stands at 0.6 mbpd.

"Currently, India's import dependence is 85%", according to a DSP Mutual Fund Report.

Petroleum imports are 25 to 30% of total imports. Every $10 increase in crude adds roughly $12–15 bn to India’s annual import bill. But this correlation is convex, at higher prices, deficit rises sharply.

"Deficits of this kind can lead to significant currency depreciation, heightened inflation and liquidity crunch," it noted.

On Monday, March 9, the oil prices breached the $100 per barrel mark to nearly hit $119, after tensions between Israel, US, and Iran kept escalating fueling fears of supply chain disruptions.

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"In prior episodes, Rupee depreciated more than 10% on such occasions, if the deficits persisted," as per the report.

Meanwhile, Neelkanth Mishra, Chief Economist at Axis Bank, noted that the current geopolitical situation was a "game of brinkmanship that may play out for four to six weeks" and that it serves the interests of neither the United States nor China. "Because this conflict does not serve the interests of China or the US, it is reasonable to expect it to be short-lived," Mishra said. 

The challenges of being a net energy importer is "becoming a smaller problem, as you can see for the same Oil trade deficit of 5.4% of GDP, India’s CAD would not reach 4.8% of GDP," it said. 

This is after India’s services exports and remittances have become large.

The global oil benchmarks were trading lower today. WTI crude was at $88.16 per barrel, down 6.97%, while Brent crude was at $92.31, down 6.72%.

On other hand, the Nifty Oil & Gas Index in trade on Tuesday emerged as the worst-performing sectoral index, falling 2.59% or nearly 305 points to 11,482.30 around 10:42 AM IST, even as the broader market showed signs of recovery.