Rising crude prices and overall supply shortage major concerns, says a SBI report

New Delhi: Rising oil prices supported by a global supply shortage and strong demand as the world recovers from Covid 19 has brought back the memories of early 2010s when oil was way above the US$ 100 mark, a SBI report has said.

“The downward slide of oil from late 2014 started providing support to the external sector of India, which is heavily dependent on crude oil imports to meet the demand. Current Account Deficit (CAD) which touched a high of –4.82% of GDP in FY13 started declining and has not gone above -2.1% since then,” said a report authored by Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

The report noted high trade deficit of US$ 22.59 billion in September 2021 but stated that trade data shows seasonality and it is fairly common to see jump in imports, as well as exports every quarter end month.

With exports rising at rapid pace the report said that achieving the target of US$ 400 billion is not a pipe dream and this will provide a strong cushion to the current account balance, even if the oil import bills rise rapidly.

“Taking everything into account our CAD projections stand at (-)1.4%. India is also witnessing robust FDI (foreign direct investment) inflows even if the FPI (foreign portfolio investment) flows are showing some volatility,” the SBI Ecowrap said.

It further noted that with CAD at a comfortable situation and an extremely unlikely devastating third COVID, Indian Rupee is going to handle any taper news with relative calm.

“Considering higher domestic inflation, as supply disruptions mount, it will not do any harm for RBI to lean with the wind and let rupee appreciate as it can lead to reduced imported inflation when metal and oil prices are rising, and clearing the liquidity overhang to some extent,” the report said.

Amid considerable divergence between wholesale and retail price inflations, the report said that such a development might miss the concerns of manufacturers who are grappling with extremely high imported inflation and a depreciating Rupee just might add to their woes.

“India’s backward linkages in the global value chains are higher than forward linkage and a weak Rupee might not help in pushing the exports as much as is touted by traditional economic theory,” said the report.

The Wholesale Price Index (WPI) inflation has averaged 11.6% in H1 FY22, remaining markedly above Consumer Price Index (CPI)-based inflation (5.34%).

UNI