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Oil may spoil growth buzz

Experts say if oil prices continue to rise, which seems like a near-term trend at least, it could pull back India’s economic growth rate by one percentage point (100 basis points). Sandeep Singh reports. Slippery Grounds

business Updated: Dec 28, 2010 01:32 IST

Is oil the next big worry for India’s growth story? The prospect loomed large on Monday as global crude prices touched 26-month highs. Dearer petroleum goods can push up costs in the domestic economy and stymie demand and thus, growth.

Experts say if oil prices continue to rise, which seems like a near-term trend at least, it could pull back India’s economic growth rate by one percentage point (100 basis points). On current reckoning, the government is aiming for a GDP growth of 9 per cent in 2011-12, after falling short of the mark in the current year.

US crude oil hit $91.88 per barrel before settling down at $91.2 per barrel on Monday, while Brent crude, a wider benchmark, traded at $93.8 per barrel. Experts are already looking at the $100-a-barrel mark as a harsh winter boosts demand in Western economies.

“If the average price for the oil basket crosses $100 per barrel, it would bring down the GDP growth rate by 50-100 basis points,” said Ritesh Jain, head of fixed income at Canara Robeco Asset management Company.

However, RBS (India) is of the view that oil will trade at less than $100 per barrel.

“I believe that dollar will strengthen and oil will be range bound below $100 per barrel,” said Ramit Bhasin, head of markets at RBS (india). “If oil trades between $90 and $100 per barrel, it would have a negative but manageable impact on the current account deficit and corporate earnings.”

One expert said as a thumb rule, every $10-per-barrel rise in oil prices shaves 0.5 percentage points off the GDP growth rate.

A surge in oil will also bloat the petroleum import bill and widen the current account deficit and put the rupee under pressure. Corporate earnings may also be hit.

“The direct implication would be on inflation and would consequently lead to not only a rise in input costs but also a general wage inflation,” said Sanjay Sinha, CEO, L&T Mutual Fund.