India depends on Iran for nearly 10 per cent of its oil requirements, with the US sanction drying this source by May 2, the country’s macroeconomic situation may go for a tailspin if an alternative is not found immediately.
India will have to increase its dependence on oil imports from OPEC nations such as Saudi Arabia and the United Arab Emirates (UAE). In addition, India may also have to look at US shale gas to stabilize its high oil demand, a Care rating report said on Tuesday.
“India’s dependence on Iran to the extent of almost 10 per cent of total oil imports means that the immediate challenge is to find alternative suppliers which will provide crude oil at the same competitive terms,” the report said.
The report noted that the rupee will be the first to be impacted as the trade deficit and current account deficit will widen. FII, FDI etc, would need to balance out this deficit or else the balance of payments would be under pressure.
On the sanction impact on current account deficit, the report said higher crude oil prices will tend to pressure the trade deficit and current account deficit. As the price of crude oil goes up, so would the value of imports.
The impact on inflation is also significant as it will be driving monetary policy decisions in future. “Inflation has been low of late and increasing only gradually due to food and fuel prices moving up. The impact would be to the extent by which crude oil price goes up.”
However, until the elections are completed, it is unlikely that there will be a full pass-through as it will affect voting patterns.
The increase in crude oil prices could also have a bearing on Indian consumers who could have to spend a higher amount on petrol and diesel.
In the case of the WPI, the overall impact will be more significant as the weight in the index is above 10 per cent.