Impact of Rising Crude Prices on India's Current Account Deficit

India's current account deficit (CAD) faces potential challenges as global crude oil prices rise. A report from Union Bank of India highlights that every $10 increase in oil prices could worsen the CAD by $15 billion. While the CAD is projected to remain at 0.9% of GDP for FY25, it may widen to 1.2% in FY26. The report also discusses the influence of geopolitical tensions and commodity prices on India's trade performance. Despite these challenges, a strong services trade surplus offers some relief. This article delves into the implications of these economic factors and their potential effects on India's financial landscape.
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Impact of Rising Crude Prices on India's Current Account Deficit

Current Account Deficit Projections Amid Oil Price Fluctuations

As global crude oil prices continue to rise, India's current account deficit (CAD) for the fiscal year 2025 is under increasing pressure. A recent analysis from Union Bank of India (UBI) indicates that a $10 per barrel hike in oil prices could escalate the annual CAD by approximately $15 billion.


The bank has maintained its CAD forecast at 0.9% of GDP for FY25, but has highlighted a slight risk of an increase due to rising commodity prices. Looking ahead, the CAD is expected to expand to 1.2% of GDP in FY26.


The report states, "We perceive a slight upward risk to our current account deficit estimate for FY25 GDP. We uphold our expectation of a widening CAD in FY26 to 1.2% of GDP compared to an estimated 0.9% for FY25."


Market Dynamics and Geopolitical Influences

Brent Crude prices have varied between $64 and $76 over the past month, with a notable 14% increase in the last two weeks due to geopolitical tensions. UBI emphasizes that global commodity prices, particularly crude oil and metals, will significantly impact India's trade deficit outlook. A sustained rise in these prices could adversely affect India's external trade performance, although sluggish global demand and modest export growth may mitigate the overall effect.


The report also notes that geopolitical factors, including tariffs and potential trade agreements with the US or Europe, will play a crucial role in shaping India's trade landscape.


Positive Aspects Amidst Challenges

On a positive note, the invisible surplus remains robust in FY25, providing a buffer against the CAD. India has reported a substantial services trade surplus of $188.75 billion, which helps counterbalance the oil trade deficit of $122.45 billion.


However, the report warns that ongoing geopolitical conflicts in the Middle East and their implications for oil markets require close monitoring, given the CAD's heightened sensitivity to fluctuations in oil prices.


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