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With Brent crude falling below the $100/barrel mark on Wednesday and near-term prospects benign, India’s oil import bill in FY23 could be less than estimated earlier and the rising pressure on its current account may ease a bit, according to analysts. Lower oil prices could also have a salutary effect on the fisc, as prices of many major commodities including natural gas and subsidised goods like fertilisers are linked to oil.

Brent crude futures dropped to $98.5/barrel on Wednesday, falling below $100/barrel for the first time since April 25, as recession fears in the west fuelled a broader selloff.

Citi Group said Brent might fall to $65 by the end of the current year and $45 by 2023-end. However, J P Morgan said prices may rise to a “stratospheric” $380 per barrel if the US and European sanctions on Russia lead to reduced crude supplies.

According to a Bloomberg report, Citi’s outlook is based on an absence of any intervention by OPEC+ producers and a decline in oil investments. Brent reached a near $140 a barrel early March.

Crisil’s director-energy Saurav Mitra said the fall in the benchmark Brent price will have a significant positive impact on India and other importing nations, including a reduction of overall inflationary pressure on these economies.

“Brent futures prices rose back 2.5%-3% in one day after the plummet. No doubt, the prices will tend towards moderation from their present levels. However, we expect a significant fall only in the medium-term. The price is forecast to reach $80-82 per barrel by 2024, and moderate to $63-68 starting 2026,” Mitra said.

When that happens, the lower price will help Indian importers of crude a better margin and allow then to pass on the reduced costs to retail customers. Outflows of foreign currency will slowdown and the overall inflationary impact on the economy will reduce in time, Mitra said.

Rating agency Icra in a note issued on July 5, said it “expects crude prices to remain in the range of $100-120/barrel for FY2023 owing to increasing demand as lock-downs ease globally, under-investment in the Upstream sector for the past several years and limited spare capacity.”

While the sudden decline came as a pleasant surprise for the higher echelons of the government, struggling to rein in an elevated inflation and a widening trade deficit that touched a record of $25.63 billion in June, the Indian government should take the tumbling of brent price with a pinch of salt.

India imports 85% of its crude requirements. The third largest oil consumer of the world imported 212 million tonne (MT) crude oil in 2021-22 for $ 120 billion.

India’s current account deficit (CAD) decreased to $ 13.4 billion or 1.5% GDP in Q4FY22, from $ 22.2 billion (2.6%) in the previous quarter thanks to a moderation in merchandise trade deficit and lower net outgo of primary income, the Reserve Bank of India said on Wednesday. However, the June quarter might have seen a higher CAD of $15.5-17.5 billion, according to Icra, which also said the goods trade deficit in most months of FY23 could exceed the $20 billion mark.

Merchandise exports grew 16.8% in June from a year before even on a high base but a 51% surge in imports, thanks to high prices of oil and other commodities, drove up trade deficit to a fresh monthly peak of $25.6 billion.

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Author: Howard Caldwell