Every $10 increase in crude oil price leads to 0.5% rise in current account deficit: UBS Securities

The benchmark indices of crude oil – Brent crude and US West Texas Intermediate (WTI) – surged over 1.5 percent Tuesday. They rose as high as $80.64 and $76.58, respectively—near a three-year high. Reacting to the surge, Tanvee Gupta Jain, chief India economist at UBS Securities, said that every USD 10 rise in oil, leads to a rise of 0.05 percent in the current account deficit.

Considering India imports 80 percent of the oil requirement, any increase in oil prices all of a sudden increases India's macro stability risk.

“Looking at oil at USD 80 per barrel, I would say the current account deficit in our base case is right now pricing in somewhere around 1.2 percent of gross domestic product (GDP) with oil at USD 70 a barrel. So every USD 10 a barrel increase in oil prices increases India's current account deficit by 0.5 percent of GDP,” Jain said in an interview to CNBC-TV18.

According to Jain, if the current account deficit goes from 1.2 to 1.7 percent of GDP, it is within the sustainable limit.

“While current account deficit from 1.2 goes to 1.7 percent of GDP is still within the sustainable limit, but we will be definitely watching out very closely for its implications on INR (Indian currency) going forward,” said Jain.

“It could actually time around the Fed indicating tapering of quantitative easing (QE) purchases in November. So definitely, risks are going up on the USD-INR front, but India's external situation as of now continues to remain stable,” she added.

UBS has also revised its FY22 forecast higher but is not pricing in USD 80 a barrel for oil yet.

“We are still contained at around USD 70 a barrel round about averaging for FY22. So I think in that sense, we are okay with our India's external stability risk despite oil prices going up on the margin,” she said.