While rising oil prices may benefit some businesses in the United States and some governments, they certainly do not provide a boost to the Indian economy. At this point in time, India’s currency is already at a very weak point, with 1 US dollar equal to 70 Indian Rupees. At the beginning of this year, the exchange rate was a ratio of 63:1 at back in 2011 was as low as 45:1. The rising oil prices may further devalue the currency and cast gloom on the potential growth of the value of the currency in the near future.
India, by nature, has a huge demand for oil. To meet that demand, they import oil from countries around the world and by definition are a net importer, as they consume more oil than they produce. In large part, this oil comes from nations like Saudi Arabia and Iran. For the first time in four years, the price of oil has hit $80. Prices have shot up as OPEC-led output cuts come to fruition and both Venezuela and Libya have decreased their oil output. More than that, the US will place sanctions on Iran that will likely cut the number of barrels they export today by more than 1 billion barrels.
Forecasts from top economists predict that the bill for oil will continue to rise the rest of this year and throughout 2019 as well. In a statement from Radhika Rao, an economist for DBS, said: “the net trade oil deficit has widened considerably, owing to a combination of high oil prices and a weak currency.” She also forecasted that the total oil import bill could reach nearly $115 billion in 2019, way above its forecasted mark of $88 billion in 2018 and an actual bill of $70 billion in 2017.
Certainly, the increase in oil prices is hurting the Indian rupee, but other factors are also weighing on the devaluation of the currency. According to an email sent from Rajiv Biwas, the Chief Economist for IHS Markit Asia-Pacific, to CNBC, “The INR (Indian rupee) is expected to continue to face depreciation pressures during the remainder of 2018, reflecting several factors including further US Fed rate hikes, India’s widening current account deficit, and negative global investor sentiment towards emerging markets currencies and assets.” Biswas also predicted that by August 2019, 1 US dollar could be worth nearly 74 Indian rupees.
At this point, it seems India has one viable solution to the currency devaluation problem: reduce dependency on oil. However, that sounds a lot easier than it actually is. Global energy consultancy Wood Mackenzie forecasts that by 2024, India will become the world’s largest consumer of oil, surpassing China, and by 2035, they will likely consume one-third of total global oil. In large part, they attribute these increases to the growth of the middle class and increased need for transportation and mobility as a whole. To the same respect, a report from Oxford Economics forecasts that India’s oil demand will increase at a rate of 4.4% annually for the next ten years and oil imports could rise 4% in the next decade from 1.4% to 5.5%.