Oil price warrants close attention
Source: DBS – India must keep eye on oil prices.
The Indian authorities are likely to watch closely the direction of oil prices and Brexit for managing domestic economy against external developments.
A favourable global environment had helped to India’s turnaround in the past two years but there are risks for India if the external backdrop turns less favourable, said Development Bank of Singapore (DBS) in its economic report on May 25, 2016.
Direction of oil prices warrant close attention as it matters most to India, said the bank. Currently, the Indian crude oil basket (in INR terms) is up 50% from its January 2016 floor.
The other macro indicators will, however, feel the heat on a sustained rise in oil prices beyond US$60 per barrel.
From a risk perspective, the direction of global crude prices will be important for India, it said. For now, it remains to be seen if oil prices stay firm in the face of a resurgent US dollar and oversupply from the oil producing nations.
“Brexit is a tail risk at this juncture,” said DBS.
Britain will vote on whether to remain in the European Union (EU) on 23 June 2016.
Should the vote swing towards the ‘leave’ camp and trigger a broader risk-off reaction, India will feel the heat through heightened volatility in the global financial markets.
“Admittedly it is difficult to draw an empirical impact on India’s real economy. But if the leave camp wins, it is likely that the UK will seek trade agreements with non-EU partners, including India,” said the bank.
But this will require the UK as a precursor to sort out its post-exit arrangement with its main trading partner – the EU being first.
Thereafter, a bilateral trade agreement with the UK might become viable as an alternate to the tough and drawn-out negotiations on the EU Free Trade Agreement. “These should provide a fillip to slowing India-UK trade. The UK accounts for 15% of India’s total merchandise trade, but its share has been declining,” the bank noted.
Trade in services has also eased, with UK service imports from India slowing and making up only about 2% of the total, much lower than with the US and Asia, DBS pointed out. fii-news.com