The economy is in for a rough ride, with rising oil prices set to continue weighing on its already-weakened currency, widen its deficit, and affect its growth outlook.
Rebounding oil prices — and India‘s unrelenting demand for it — will push up oil imports and widen its current account deficit, which measures the flow of goods, services and investments into and out of the country, economists say.
That widening deficit will result in a weakening rupee, they say, as more imports mean India has to buy more foreign currencies to meet its needs.
“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,” IHS Markit Asia-Pacific Chief Economist Rajiv Biswas, said in an email to CNBC.
Biswas predicted that the will depreciate further, falling to 72 rupees against the dollar by the end of 2018 and reaching 74 rupees by August 2019. The rupee was last at 70.16 against the dollar at the close of Monday — representing a 9.96 percent decline since the beginning of this year.
The rupee, along with the and , will continue to be the most vulnerable in Asia, said a ANZ Research note.
India‘s foreign reserves have been affected by these developments. “A challenging global environment has compelled the Reserve Bank of India (RBI) to intervene aggressively this year to contain rupee depreciation … the drawdown in foreign reserves has been significant,” DBS analysts said in a recent note.
Global energy consultancy Wood Mackenzie forecast that India will overtake China as the world‘s largest oil demand growth center by 2024. According to its report on Monday, demand is expected to grow by 3.5 million barrels per day from 2017 to 2035, accounting for a third of global oil demand growth. That‘s driven by rising income levels, a growing middle class and increasing need for mobility, the report said.