According to UBS, the threshold for higher global oil prices for India is $70-75 per barrel (bbl), wherein macro stability risks widen but remain manageable.
A 10 per cent average crude oil price rise could increase consumer price inflation (CPI) by around 25 basis points (bps), UBS says and would dent GDP (gross domestic product) growth by 30 bps if the fuel cost is passed on to consumers.
“Oil strengthening and sustaining around $75-85/bbl could undermine macro fundamentals. In such a scenario, we see a risk of three – six per cent depreciation in the rupee against the USD from the current level and at least 50 bps policy rate tightening in FY19, depending on where global crude oil prices settle,” the report says.
Building in the current oil price of $75/bbl, UBS pegs India's current account deficit (CAD) at 2.5 per cent of GDP in FY19, but remain below the peak of 4.8 per cent of GDP in FY13.
“Our broad view is India may not see a balance-of-payment surplus in FY19, as it has seen in the past few years, but India's forex reserves ($420 billion) seem reasonable, based on a reserve adequacy metric, to withstand volatility due to global risk aversion,” the report says.
Investors, according to UBS, are also concerned that the government could miss its fiscal deficit target of 3.3 per cent of GDP for FY19. The combined fiscal situation remains stretched on the risk of populist spending ahead of the 2019 elections, farm loan waivers by some states and rising oil prices.
“A pick-up in GST collections over upcoming months could provide some comfort if the government can improve compliance under the e-way bill system and online invoice matching,” UBS says.