In an interaction with ETNow, A Prasanna, Chief Economist, ICICI Securities, says oil price rise will affects current account deficit, and then the balance of payment.
ET Now: If bond yields rise and rupee goes to the 66 level, it will make our macro look vulnerable. Does it mean investors would stay away?
A Prasanna: In terms of bond market, the volatility is much higher than what we are used to, so there is some amount of exaggeration there. But if you look at the rupee, clearly over the last year, both the trade and current accounts have worsened significantly, and I would expect most of us — the consensus expects it to worsen further if oil continues like this. So, I would say that it was anyway this correction in rupee overdue and therefore it should not come as too much of a surprise.
ET Now: The movement of the currency sort of reflects Indias underlying macro picture. Do you think that this in a sense is true with the way crude oil as well is shaping up the overall fiscal deficit position etc. Do you think that this is in a true sense reflecting the macro picture the way the currency is shaping up?
A Prasanna: When oil goes up, what it directly affects is current account deficit, and therefore the balance of payment picture. Also, the way the government has captured most of the fall in oil prices through higher taxes, it means that with each dollar rise in the price there is a pressure on the government to cut taxes, because it would be very difficult to pass on the entire rise to pump prices, This means that rather than inflation getting affected, immediately what we are likely to see is that fiscal deficit widening further and therefore the impact on inflation could get delayed. But essentially what is happening is that oil is going to affect all key variables as well the fiscal deficit and then over a period of time inflation and of course, over a period of time this will have a negative effect on growth as well.
ET Now: Opec meet is coming at a time when crude oil prices have been on an absolute tear with Brent crude firmly above $73 per barrel mark. Saudi Arabia is now eyeing pricing at $80 or even there are talks about $100 a barrel. How are you looking at the meet in light of all of this?
A Prasanna: Well there are some headlines coming in which suggest that Russia is not in favour of continuing with this cooperation beyond 2018. So perhaps everyone should take a step back and not get carried away with those oil forecast, of course, I mean looking at the current trend and the momentum in the market $80 is always possible, but I think extrapolating it further I think is not the right way to go and should remember that one year back when oil was trading around $50 there were still views that it can collapse further. So in that sense I think they are talking about $100, this is clearly an exaggeration now.
ET Now: But I want to also understand your view then of the implication of crude oil prices. I know maybe talking about a $100 a barrel as you said would perhaps be a little bit a far reaching but even where it is right now, the implications of this on the Indian economy and some of the overall the macro picture, how are you looking at it especially if it continue to remain around these elevated levels?
A Prasanna: That is right. I think most of the forecast in the market including our own on key variables such a current account, fiscal deficit and inflation would all be based on oil between 60 and 65, when most of us (18:13) started the year with forecast of around $60 and now probably we would have (18:18) to 65. So even if it continues to 70 which means that all the estimates go up particularly on the current account deficit, so definitely it is a negative and some of it is already reflected in the rupee movement.
ET Now: What are the things to watch out for, I mean say crude stays at this level, rupee stays at this level, 10-year bond yields do not cool off further. What are the things to watch out for for deciding on the macros or any investor which is putting money into India would watch out for?
A Prasanna: Well obviously one key factor would be how the government responds so if they decide to cut taxes because at this level obviously the extent of price hikes (18:59) would be substantial so if they decide to cut taxes which means that at least in the near term there is no inflation impact but it just worsens the fiscal picture further which would be negative news for the bond market. So I guess for the bond market there are no easy options — either inflation goes up or fiscal deficit goes up in the first instance. And again (19:19) with the bond market I think now the Reserve Bank is also favouring very difficult call, of course we know that the minutes coming out yesterday that the probability of rate hikes in the near term have increased substantially but also looking at the way bond market is behaving, I think our base should be concerned about (19:39) financial stability so these are some tricky choices which RBI has to make.