‘Emerging countries like India more vulnerable to big oil price moves’

Given weak consumer demand, higher oil prices can result in stagflation in an emerging economy like India, which imports more than 70% of its oil needs, says a report.

In economic parlance, stagflation means a situation in a country's economy when inflation is persistently high, demand is stagnant and unemployment rates are high.

According to the Japanese financial services major Nomura, when the rise in oil prices is driven more by supplyside factors – as is the case currently – it tends to be more damaging to large net oil importers.

This is because, "in the absence of a strong pick up in exports, higher import cost of oil could sharply worsen current account positions, compress profit margins and, to the extent that firms pass on higher production costs, raise consumer price index (CPI) inflation," it said.

As per the report, for a country like India, higher oil prices are equivalent to a negative terms-of-trade shock that weakens growth, pushes up inflation and deteriorates the twin deficits.

"Given weak demand, higher oil prices, even if temporary, can result in a stagflationary outcome," Nomura said.

According to Nomura estimates, every USD10/bbl rise in oil price would reduce gross domestic product (GDP) growth by around 0.2 percentage point, widen the current account deficit by 0.4% of GDP, widen the fiscal deficit by 0.1% of GDP and add around 30 basis points (bp) to headline CPI inflation.

It further noted that if higher oil prices result in rupee depreciation (against the US dollar), then we estimate that, for every 5% rupee depreciates against the dollar, headline inflation would increase by 20 bp.

"Given this is a temporary supply-side shock, we expect the Reserve Bank of India (RBI) to look through higher oil prices, especially since CPI inflation will be at its 4% target and as the negative output gap would persist," Nomura said.

Meanwhile, around three million barrels per day of Saudi oil will remain offline for a month, about half the production halted by the weekend's devastating attacks on key crude facilities, S&P Platts said Tuesday.

The report came as oil prices dipped slightly following record gains Monday as uncertainty prevailed on global markets over when the OPEC kingpin will be able to restore lost production.

Investor wealth plummets Rs 2.72 lakh cr in two days; Half of lost Saudi oil to remain offline for a month, according to S&P Platts