Hong Kong-headquartered brokerage CLSA said that a further rise in oil prices could damage investor sentiments and raise twin deficit fears.
"Oil is now firmly above US$70 and theres talk of it moving to US$80. This could further damage investor sentiments, as the economy doesnt have a lot of cushion, especially in a pre-election year," said CLSA in a note.
If oil goes to $80 per barrel and with it being a pre-election year, the government may decide to maintain petrol and diesel prices at the current level and there could be a Rs 4 per litre cut in fuel excise duties, implying a tax revenue impact of Rs 500 billion.
The government's petroleum subsidy for FY19 could be higher by Rs 300 billion than budgeted if oil were to average $80 per barrel, it said.
CLSA said the twin deficit issues could re-emerge with current account deficit moving up to 3 per cent of the Gross Domestic Product and fiscal risks to the tune of 40-50 basis points of GDP. Weak US dollar and strong RBI reserves would limit the currency impact, but the era of rock-like stable rupee may be behind, the firm said.
In terms of sector impact, oil marketing companies could be at risk if the government passes on some subsidy burden to them.
Higher bond yields for a prolonged period could potentially lead to NIM compression for NBFCs, the firm said. Rising oil is also a negative for users of oil-based chemicals industry including consumer staples and paints, it added. CLSA said that a potential weaking of the rupee will be positive for exporters.
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