US curbs on oil imports from Iran is a new worry for India

The outlook on crude oil is getting murkier. The US wants India and other countries to stop importing oil from Iran by 4 November, as sanctions loom. India imports almost 80% of its oil requirements and Iran is its third-largest supplier. The country’s share in India’s import volumes was 10.4% in FY18.

What are the implications of this move?

Iran exports about 2.4 million barrels per day of crude oil to the world. Analysts say even if half of this supply doesn’t hit the market, there will be upward pressure on oil prices. It will be important to watch whether Saudi Arabia can make up for this shortfall given its large spare capacity.

However, the good news is that not many expect the consequences of the pressure from the US to be lethal. Vijay Bhambwani, chief executive of trading firm BSPLindia.com, says that while the Saudis will gleefully support this embargo, Russia may not. Turkey and China will probably not and India’s stand remains to be seen, he added.

“India follows only UN sanctions, and not unilateral sanctions by any country,” said external affairs minister Sushma Swaraj last month.

It is likely that India will continue its imports from Iran, said Anoop Bhatia, vice president and sector head (corporate ratings) at Icra Ltd. “India had benefited from favourable credit terms during earlier sanctions on Iran and if India continues to import from Iran it may look for such benefits again,” he said. India has already started exploring to revive the older payment mechanism in rupees for Iran imports, added Bhatia.

Additionally, India could evaluate whether it wants to consider oil purchases from the US, which has been increasing its supply.

Nonetheless, Brent crude prices gained 0.81% on Wednesday to $76.93 a barrel. While the situation may not be dire, uncertainty has increased. That is bullish for crude oil prices and bearish for the Indian economy. Falling crude oil prices were a big tailwind for the economy in the first couple of years of the current government and rising oil prices will now be a headwind. The current account deficit will rise and, combined with a weakening rupee, it is likely to stoke inflation. What’s more, the worsening macro picture comes at a time when the global environment for trade and capital flows is becoming unfavourable.

The Indian stock markets have so far weathered these concerns on the strength of domestic fund inflows, but they felt some heat too on Wednesday, with the Sensex declining 0.8%. Investors in state-run oil marketing companies—Bharat Petroleum Corp. Ltd, Hindustan Petroleum Corp. Ltd and Indian Oil Corp. Ltd—were a nervous lot, with the stocks falling in the range of 6-8%. Investors fear these companies will likely find it challenging to pass on the impact of higher prices to consumers.