Thread by @arjungn80

India and its oil-dynamics. We spoke last week about the two key known unknowns that the global and domestic markets were closely tracking. This week, we take a look at India's oil dynamics. Before we get to the specifics, it is very important to note here that a rise in...(1/9)

...oil prices in itself does not matter. It is why they rise that is of more importance. If the increase in oil prices is because of an increase in demand, then it remains a positive. This is because like a rising tide lifts all boats, the increase in oil prices...(2/9)

...(in this scenario) is a result of growing demand globally and domestically. It is because of this that the secular rise in oil prices to $76 in 2007 from $23 in 2003 was not seen to have any negative macro stability implications. However, if the rise in prices is on...(3/9)

...account of supply-disruptions, when the inherent demand (domestic) is weak, this could have negative- implications. What level can that be? Analysts note here that if non-OPEC members do not raise supply sharply (raise seen unlikely now), prices could stay range bound...(4/9)

...for a while. They also note that $80/bbl crude prices, could start eating into demand; rather demand erosion/disruption starts setting in. There is a silver lining here. India's FDI inflow has remained strong in the last few years and for FY21 net FDI inflows ($43.2bn)...(5/9)

...held up to FY20 levels ($43bn). Ideally, we have seen FDI inflows into India to be a function of global risk appetite. The last few years have seen some delinking. If the above read is true and if FDI inflows into India are on a structural uptrend, then this could...(6/9)

...greatly create a buffer (through capital account inflows) and finance any pressures that rising oil imports could create into the years ahead. This could also reduce volatility in India's rupee depreciation trend. Now for the numbers around crude price impact. Every...(7/9)

...10% increase in crude prices increase the current account deficit by 0.3% GDP, pushes up CPI inflation by 0.4% y/y, and WPI inflation by 0.8% y/y. On the fiscal, the impact will depend on how much the government is willing to cut its fuel duties; that eventually pulls...(8/9)

...down its excise duty collection. Sensitivities suggest that a Rs1/litre cut in fuel excise duty could lead to a drop in excide collections by around 0.06% GDP. (9/9)