Iran sanctions may hit India's forex outflows, weaken rupee further

India’s economic woes due to rising crude prices could aggravate if India gives in to the US dictate on sanctions against Iran.

The US clampdown on Iran has come at a time when there is already a demand-supply imbalance in the global oil market, which has pushed up crude prices. The Brent crude has already soared to over $79 per barrel. Bank of America Merrill Lynch has forecast oil prices to touch $90 per barrel due to Iran sanctions.

Economists and energy experts believe that the US sanctions against Iran could see a withdrawal of some of the supply in the market which could result in a further rise in global oil prices.

This, they believe, could adversely impact India’s current account deficit (CAD), which widened to 1.9% of the GDP in FY18 from 0.6% of the GDP in the previous year. India is a net importer of oil.

Anoop Bhatia, VP and sector head, Icra Limited, told DNA Money that Iran’s share in India’s oil basket dipped from 13% in FY17 (2016-17) to 10% in FY18 but has been rising in recent months (February to April 2018).

“If you see, 10% is not significant in the overall scheme of things for India as alternate sources of crude are available. However, it is happening at a time when the global demand-supply balance is relatively tighter than what it used to be a few years back pushing up crude oil prices. OPEC (Organisation of the Petroleum Exporting Countries) has now decided to increase production but the increase will not ease global supply-demand position if it has to fill the gap which will get created because of fall in Iran exports.” said Bhatia.

Last week, the Trump administration threatened to slap sanctions against companies buying Iranian crude oil after November this year. India, which has been gradually reducing its purchase of Iranian oil since 2012, is likely to be hit hard as it enjoys discounts, favourable trade terms and insurance with the Persian nation.

“Overall Iran’s discounts were higher than Saudi and other countries, which will push up the crude cost. Iran also offered a longer credit period. So significant reduction in Iran imports will certainly have a marginal negative impact on Indian refiners,” he said.

India meets around 85% of its oil needs through imports and so any upward movement in crude prices is likely to have an adverse economic impact.

Bhatia said climbing crude will be inflationary, increase foreign exchange outflow and could keep the pressure on an already weak rupee.

India is the third largest consumer of oil in the world after US and China. Its oil imports were up 1.8% in 2017 at 4.37 million barrel per day. Iraq is its biggest supplier, followed by Saudi and Iran. Last year, India imported 4.71 lakh barrel per day of crude from Iran. 

Deepak Mahurkar, partner and leader – oil & gas industry – PwC India, said rising crude prices are likely to see petrol and diesel rates shoot up, which will exert inflationary pressure and lead to a possible hike in bank rate by the Reserve Bank of India (RBI). The central bank has already made one repo rate hike in the last monetary policy review after a long pause. The apex bank’s decision was based on the consumer price index (CPI) inflation moving out of its comfort zone. 

“If Iran cuts oil supply then crude prices will further go up. That could result in petrol and diesel prices moving up. This will be inflationary and could see more interest (bank) rate hike. So, there could be some economic impact over a short term,” he said.

Mahurkar said since oil imports from Iran were largely rupee denominated, it curtailed foreign exchange outflow to some extent and kept the forex reserve healthy.

However, if India were to replace Iran with countries like Saudi Arabia, Russia, Iraq, US and others for the 10% of its oil demand then it may have to revert to dollar-denominated imports.

Aditi Nayar, vice president and principal economist with credit rating agency Icra, said any impact of US against Iran on India would be indirect.

“India may have to find alternatives to replace a portion of Iranian oil if required. It would be Indian refineries which may face some impact, albeit it’s not expected to be significant. There may be no direct economic impact, rather an indirect one, in form of a rise in global oil prices,” she said.