How weak rupee, high crude prices impact household budget

Crude prices have touched a 13-year high level of USD 130 per barrel, while the rupee value has dropped to Rs 77 against a dollar. Here's how this is going to affect the budget of an Indian household.

The spike in crude oil prices has put India — a net importer — into a precarious position. While crude prices touched a 13-year high level of USD 130 per barrel, the rupee value depreciated to a low of Rs 77 against a dollar. These two major concerns are expected to have a significant and adverse effect on the economy if the trend continues. Experts believe that crude oil at USD 100 a barrel and other commodity shocks in FY23 could shave off up to 80 basis points of real Gross Domestic Product (GDP) growth, which could end up below seven per cent.

Depreciation of the rupee causes higher imported input cost and thus higher imported inflation; higher cost of external debt; and a mild impetus to exports and growth,” Madhavi Arora, Lead Economist, Emkay, told India Today. The depreciation could also tighten the RBI forex policy intervention stance and may lead to drain INR liquidity, she added.

A sharp fall in a short period could lead to financial sector nervousness, and extreme cases may lead to a rise in interest rates.

The rise in import prices, specifically for petroleum products, pushes the overall current account deficit. And this was observed in the past as well.

“The current account deficit is likely to widen by nearly USD 14-15 billion (0.4 per cent of GDP) for every USD 10 a barrel rise in the average price of the Indian crude basket,” according to ICRA. If the price averages USD130 a barrel in FY2023, the CAD will widen to 3.2 per cent of GDP, crossing three per cent for the first time in a decade, it added.

With import prices going high while simultaneously needing to shell out more rupees, retail inflation is affected — the prices of household items go up. This trend was also observed in the past. However, in recent years, this trend has not been very clear as there are several factors behind inflation.

“Without accounting for a full pass-through of oil prices to retail pump prices, retail inflation in FY23 could be more than 120 basis points higher than the RBI’s modest 4.5 per cent estimate,” noted a report by Emkay Global. Every USD 10 a barrel increase in the Brent price impacts India’s retail price inflation by 30-35 bps and WPI inflation by 130 bps, it added.