US' Iran curbs to take toll on Indian economy; oil price rise to hit CAD, rupee, says report

that Tehran offers after May 2, Care Ratings said in its report on Tuesday.

According to the rating agency's report, higher crude prices will put pressure on  the trade deficit and CAD. An increase in crude oil prices by 10 percent could translate into the CAD increasing by 0.4-0.5 percent of GDP.

The ratings agency report also said that the sharp increase in import bill would put pressure on the rupee.

Crude prices jumped to $74 a barrel on Monday, the highest level since November, following the US announcement and equities witnessed the worst tumble in 2019.

Sustained increase in the price in the range of $70-75 a barrel or higher can bring the rupee down by 3-4 per cent on an annual basis, given that the dollar has already started strengthening in the global market.

The increase in crude oil prices could also have a bearing on the Indian consumers who could have to spend a higher amount on petrol and diesel, the report noted.

"The impact on inflation will vary depending on the index being viewed. In the case of Wholesale Price Index (WPI), the overall impact will be more significant as the weight in the index is above 10 per cent and hence depending on how much of the increase in price is passed on the impact of 10 per cent increase in crude oil prices can lead to 1 per cent in the WPI in the extreme case," the report reads.

"In the case of Consumer Price Index (CPI), the impact directly would be through transport and communication where the weight is 2.39 percent which can mean an increase of around 0.24 percent assuming that the kerosene and LPG prices are fixed and are not changed," the report added.

The imposition of US sanctions and consequent rise in crude oil prices could lead to the Reserve Bank of India (RBI) indicating that oil prices need close monitoring and may be one of the important considerations which could lead the Monitory Policy Committee (MPC) to postpone a rate cut in the June bi-monthly committee meeting. The RBI's rate setting panel may postpone a rate cut that is widely expected to be announced in June, the report stated.

Rising crude prices can have a two-way impact on the domestic economy, which will play out on both the revenue and expenditure fronts.

While higher oil prices mean more revenue for the states as tax is ad valorem, it may not matter for the Centre as the rates are fixed.

Oil marketing companies would earn higher profits if there is a pass-through which can be beneficial for the government too unless the subsidy on kerosene comes in the way, the report added.