Rising Oil Prices Threaten India's Current Account Balance

In the wake of escalating global crude prices, India's current account deficit (CAD) for the fiscal year 2025 encounters potential risk, as elucidated in a report by Union Bank of India (UBI). A mere USD 10 hike per barrel in oil prices could exacerbate the annual CAD by approximately USD 15 billion.

UBI has sustained its CAD forecast at 0.9 percent of GDP for FY25, albeit acknowledging a slight upward risk driven by commodity price pressures. Looking forward to fiscal year 2026, the CAD is anticipated to broaden to 1.2 percent of GDP, amid significant fluctuations in Brent crude prices, which have oscillated between USD 64 and USD 76 in the past month.

The report underscored that global commodity prices, particularly crude oil and metals, will be pivotal in shaping India's trade deficit outlook. Nevertheless, feeble global demand and sluggish export growth might temper the overall impact. Geopolitical dynamics and potential trade deals with Western nations could further shape India's trade scenario.

On a positive note, a robust invisible surplus continues to offer some respite for FY25's CAD, as showcased by a substantial services trade surplus of USD 188.75 billion, partially neutralizing the oil trade deficit. Yet, the report warns close attention is needed for ongoing geopolitical tensions in the Middle East, given their potential to disrupt oil markets.

(With inputs from agencies.)