India is counting the cost of its crude oil dependency

Tucked away in the news stream of the past few days has been a developing situation in India. Whilst the headlines have been made by Turkey there have been currency issues in the largest part of the sub-continent as well. Here is DNA India on the subject.

Indian Rupee on Thursday had hit a fresh record low, the Rupee opened at 70.22 versus the US dollar. In wake of the Turkey crisis, the Indian currency started off the session on a weak note. Earlier on Tuesday, after opening at a marginal high of 69.85 against the US Dollar, the Indian rupee touched an all-time low of 70 per US dollar.

The Indian currency touched an all-time low of 70.08 against the US dollar, while marking depreciation of around 10 per cent in 2018.

The fall came majorly due to a drop in Turkish Lira, which helped the US dollar to gained strength on the back of fears that economic crisis in Turkey could spread to other global economies.

In fact it fell to 70.7 this morning versus the US Dollar which is an all time low. Some of the move may have been exacerbated by the issues facing Turkey but over the past couple of days the Turkish Lira has rallied strongly whereas the Rupee has continued to fall. A factor has been the strength of the US Dollar or what is being called King Dollar. This reminds me that themes and memes can change rather quickly in the currency world if we step back in time to the 25th of January.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos. The currency’s short term value is “not a concern of ours at all,” he said.

If pressed now I guess the US Treasury Secretary would emphasise this bit.

“Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and the fact that it is and will continue to be the primary currency in terms of the reserve currency,” he said.

Returning to the Rupee we see that it had started to fall before the turn in the US Dollar as conveniently it began at the turn of the year when it was at 63.3 versus it.

What are the consequences?

The first is simply inflation or as DNA India puts it.

Continuous downfall in Indian Rupee is worrisome for imported goods as the cost of imports will go up.  Currently, India imports around 80 per cent of its crude requirement. The rupee downfall will expand India’s import bill and will eventually be contributing to the inflation.

This will add to the situation below. From The Times of India.

Inflation based on consumer price index (CPI) for the month of July came at 4.17 per cent, government data ..

That was an improvement and as so often in India the swing factor was food prices.

The food inflation came at 1.37 per cent, driven by cooling of pulses, vegetable and sugar rates.

However a boost is on its way and as inflation is above the 4% target things could get especially awkward should food prices swing the other way.


One of the economics 101 assumptions is that higher interest-rates boost a currency but as I warned back on the 3rd of May the situation is more complex than that and Argentina reminded us again by raising to 45% earlier this week. As for India we see this.

increase the policy repo rate under the
liquidity adjustment facility (LAF) by 25
basis points to 6.5 per cent. ( Reserve Bank of India August Bulletin)

That was the second rise this year and these have reversed the previous downwards trend. Of course the problem is that the RBI is perhaps only holding station with the US Federal Reserve.


India maintains a sizeable foreign currency reserve which was US $406 billion at the last formal update in March. However it will not be that now if this from Reuters on Tuesday is any guide.

Subhash Chandra Garg, secretary at the department of economic affairs…………said the RBI has spent about $23 billion so far to intervene ..

So we see that the fall has come in spite of intervention which sits rather oddly with the claim from Subhash Chandra Garg that the currency fall does not matter. Also it is usually rather unwise to indicate a currency level as he did (80) as events have a way of making a fool of you.
Anyway using reserves can help for a while but care is needed as quickly markets switch to calculating how much you have left and how long they will last at the current rate of depletion. At that point intervening can make things worse.
Looking at India’s  domestic economy a clear factor in the currency debate is its trade position. The latest numbers were as highlighted above by DNA India heavily affected by the oil price.


Oil imports during July 2018 were valued at US $ 12.35 Billion (Rs. 84,828.57 crore) which was 57.41 percent higher in Dollar terms and 67.76 percent higher in Rupee terms compared to US $7.84 Billion (Rs. 50,565.29 crore) in July 2017.

Such a development feeds into the existing Indian trade problem.

Cumulative value of exports for the period April-July 2018-19 was US $ 108.24 Billion (Rs 7,29,823.08 crore)……….Cumulative value of imports for the period April-July 2018-19 was US $ 171.20 Billion (Rs. 11,54,881.70 crore).

Whilst a little care is needed as petroleum exports grew by 30% overall Indian export growth is on a tear at 14%. Many would love that, but the rub is that not only are imports much larger but due to India’s oil dependency they are rising at an annual rate of 17%. So as we stand things are getting worse and according to Business Standard there is trouble ahead.

India’s crude oil import bill is likely to jump by about $26 billion in 2018-19 as rupee dropping to a record low has made buying of oil from overseas costlier, government officials said today…….. If the rupee is to stay around 70 per dollar for the rest of the ongoing fiscal, the oil import bill will be $114 billion, he said.


The other side of the coin about the Indian economy was highlighted by the IMF only last week.

India’s economy is picking up and growth prospects look bright—partly thanks to the implementation of recent policies, such as the nationwide goods and services tax. As one of the world’s fastest-growing economies—accounting for about 15 percent of global growth—India’s economy has helped to lift millions out of poverty.

Although developments since the writing of the report may have more than a few wondering about this bit.

India can benefit from improving its integration with global markets.

Perhaps it is a case of Blood,Sweat and Tears.

What goes up must come down
Spinnin’ wheel got to go ’round

There was of course the domestic issue created by the demonetisation debacle not that long ago but the real achilles heel for India is oil. Something of a perfect storm has hit it where the oil price has risen by 40% over the past year and more recently that has been exacerbated by a stronger US Dollar.

So both the economic and Rupee issues seem as much to do with energy policy as conventional economics. Can India find a way of weaning itself off at least some of its oil dependency?

Me on CoreFinance TV


9 thoughts on “India is counting the cost of its crude oil dependency

  1. Hello Shaun,

    its a problem for China too, like us their oil fields are getting old. At least India has some coal but if we go down the route of we can burn ours because the West ( Britain in particular ) burnt theirs then yes we will get a change in climate ( even if you don’t think going from 0.3 % to 0.4% makes much of a difference) .

    If you discount climate changes then think about the investment in all that coal fired power stations that produce smog , then you find reserves of coal get short and the price goes up for that too….

    We have a similar issue – look at the cost of us buying oil that back in 1998 that we paid for with our excess production from the North Sea, now we can’t , we just print paper ……

    oh windmills ! yah that will get them off oil – no, it didn’t for us – we started burning coal again , and lots of Nat gas too.

    so can India frack for gas ?

    cheaper to build , quick too, but will there be enough gas to go around ? ( yes the US of A exports gas but enough ? from quick depleting fields? )

    interesting times


    PS : presuming we can get out of this hand cart , the populations of SE Asia will be the big economic center of the world , not the West

    • Hi Forbin

      At first I was thinking of this as perhaps a story about renewable energy but as you say it might help but with current technology it doesn’t work as The Diplomat explained back in April.

      “While installed renewable capacity is growing rapidly, it has so far underperformed expectations. Neither wind nor solar can replace coal as a supplier of baseload power in the near future, especially while energy demand growth outpaces supply and battery storage remains prohibitively expensive.”

      They end up pretty much at your coal point.

      “According to India’s Draft National Energy Policy, energy demand in 2040 will be 4.5 times greater than 2012 levels as India remains the biggest driver of global energy demand. While India relies heavily on imports for oil, the country sits on coal reserves ranking among the top five in the world. That helps explain why coal will still meet over 40 percent of Indian energy needs three decades from now.”

      This is quite something.

      “Many families without electricity cook food on wood or dung fires which emit toxic fumes, killing an estimated 1.3 million Indians a year.”

  2. It is simply amazing watching the effect of a strong dollar. Whether it’s Turkey or India, it seems to cause extraordinary stress.
    Thanks, Shaun, for pointing all this out as I haven’t seen a single article about India’s woes until this one

  3. India has always been quite an interesting one for me. I remember it being said years ago that the Chinese know how to sell things, but the Indians know how to make money, plus Friedman’s comments about the British-imposed bureaucracy holding India back (until the reforms around 2000) . Then when I was taking my MBA in 2003, I was working for Pearl Assurance – I had many calls from OAPs, who had been had over by some IFA, who had persuaded them to put their life savings into dot.bombs, but just as many from Jack the lads, who just wanted to hear how much their Indian and Chinese shares were worth compared with the purchase cost, which they had “forgotten”. With a rising population and burgeoning middle class, including lots of engineers (who learn German rather than English, which tells you something) , it did seem set fair for them, but of course, any rising industrial power needs more resources than it has – like the UK and USA – but India was going to have problems building an empire! Their interest rate seems quite sensible and it is 2% above inflation, so the FX was the only risk. Higher rates also mean there are no Chinese/Irish/Spanish ghost town developments.

    When I was at Maersk in 89, a bunch of Indians wanted to buy a quite old, small LNG carrier to increase their expertise in this area, not least as major producers in the Gulf were not far away. In early 2001, there was an article in the Economist about how the best route to carry LNG from the central Asian republics to western markets was over Afghanistan to ports in Pakistan. The US was not just fighting Islamic terror when it invaded Afghanistan, not least as negotiations were already in hand between US oil companies and the Taliban to do precisely this. Ever wondered what happened? The Yanks signed a deal to build in 2002 but abandoned the pipeline in 2005. It has been revived as TAPI – I standing for India with all the talk being of supplying south Asia with the Taliban bought off. So, resources are India;s Achilles heel, albeit access is not a problem, more the cost. If there is a world downturn, (Sky put up an interesting item on how many holders are dumping US bonds and the Daily Heil is getting worried about UK house prices), the cost of crude and gas will fall, so maybe this is not such an issue for India at least in the short term? Worth a few rupees even if the growth of the 2000s has faded.

    • Hi David

      What struck me looking at the issue was the scale of it. There are now over 1.3 billion Indians and many do not even have electricity. So looking ahead there is going to be enormous demand but unless there is a “something wonderful” energy supply moment 2001 A Space Odyssey style where is the supply going to come from?

      • Looks like LNG will be a big component – Malaysia, Australia and Qatar are within easy reach (Indonesia will soon be a net importer) plus TAPI.

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