Head Line: Explained: Impact of crude oil price rise on the Indian rupee
1) Mains Paper II: Effect of policies and politics of developed and developing countries on India’s interests, Indian diaspora.
Why in news:
- Brent crude rose to an intra-day high of $74.31 per barrel on Monday, and was trading at $73.7 per barrel, up $1.7 or 2.4%, from its previous closing.
- The Indian rupee fell 31 paise against the dollar, and was trading at $69.67.
- A rise in the price of crude oil hurts the economy because crude accounts for a significant portion of India’s overall imports.
- If crude rises further, it will not only impact the stability of the rupee and the rise in stock markets, but may also produce an inflationary effect.
Reasons for rise in the price of Brent crude:
- The spike in prices on Monday followed reports that the United States will stop granting sanction waivers to any country importing Iranian crude or condensate beginning May 2, 2019.
- While the spike in prices was on account of this report, crude oil prices have been rising steadily since March on concerns over supply from OPEC, and the US sanctions on Venezuela.
- Over the last two months, Brent crude prices have risen 14.7% from a level of $64.76 per barrel on February 25 to $74.31 on Monday.
- Monday’s prices were the highest in nearly six months. Brent crude closed at $75.47 per barrel on October 31, 2018.
What is the impact on the rupee?
- Inflow of funds from foreign portfolio investors led to a strong recovery in the rupee between January and March 2019.
- However, the rupee has been rising against the dollar since the reversal in the trend of crude prices.
- If Brent continues to rise, the rupee is likely to face additional pressure. While expectations of weakening global growth may temper its rise, the news of the end of waivers for the Iran sanctions has spooked the market.
- Crude has traditionally been a big determinant of the way the rupee moves. In October 2018, the rupee fell to an all-time low of 74.34 against the dollar in line with rising oil prices.
- Brent crude had hit a level of $86 per barrel in October, putting pressure on the rupee and on India’s current account deficit.
- However, as crude prices declined over the following months to levels of around $52 per barrel by the end of December 2018, it offered relief to both the rupee and the economy.
- A weak rupee hurts the country on account of the higher import bill and current account deficit, and also tends to be inflationary.
Impact of US decision on Iran:
- In the 10-month period between April 2018 and January 2019, India imported $97 billion worth of petroleum oil and oil obtained from bituminous minerals crude.
- Almost 11.2 per cent of petroleum oil, worth $10.9 billion, were imported from Iran.
- The US decision to end waivers for countries importing crude from Iran beginning May 2 may hurt India’s interests, as it will have to look for alternative sources of oil.
- The US sanctions on Venezuela are already restrictive for India. From April 2018 to January 2019, India imported almost 6.4% of its requirement from Venezuela.
- If both countries are now pushed out of India’s equation, almost 17.6% of its total imports will be impacted.
- Also, if the total supplies from these two big oil exporters is kept out of the market, it will lead to a supply crunch, and likely increase in overall crude oil prices.
Alternatives available for India:
- While Iraq is the biggest exporter, Saudi Arabia is a close second, and both of them account for 38% of India’s total petroleum imports.
- UAE and Nigeria together account for 16.7%. However, the biggest change has been the entry of the US as a major player.
- While it did not figure in the list of top 10 petroleum exporters for India in 2017-18, in the 10 months of FY’19, the US stood at number 9 with an over 3% share of India’s petroleum imports.
Head Line: Terror next door
2) Mains Paper II: Bilateral, Regional and Global Groupings and agreements involving India
- The Easter Sunday bombings in Sri Lanka could widen ethnic faultlines, threaten to disrupt a decade of calm.
- Sri Lanka’s decade of peace after the LTTE’s military defeat in May 2009 has been shattered with a diabolical plan to drag the country back into its darkest days.
- The death toll is nearly 300 from the chain of eight bombings on Easter Sunday targeting churches and hotels across the island nation, worse than anything it has experienced at the hands of the LTTE in the three decades of civil war.
- The scale and the ferocity of the attack has no precedent in Sri Lanka’s troubled history, one from which it believed it had finally emerged.
- In the last decade, a generation of Sri Lankans has come of age for whom conflict was history, who have no experience of curfews and emergency regulations or the Prevention of Terrorism Act.
- Now all this is threatening to engulf Sri Lanka again.
Failure of Government to act on intelligence inputs:
- It is Prime Minister Ranil Wickremesinghe’s acknowledgment that the country’s security apparatus had “prior information” on the attacks that causes more anguish.
- The differences between President Maithripala Sirisena and Prime Minister Wickremesinghe appear to have played a good part in the security warning not being taken seriously.
- The PM has alleged that he was not kept in the loop about the intelligence warnings.
- If so, the inability of the country’s top functionaries to get along has had deadly consequences. It casts their leadership abilities in extremely poor light.
- However, the administration has done well to prevent any backlash on the Muslim community.
Why now, and why Sri Lanka?
- Given that investigators believe this was the handiwork of radicalised local Muslims, there have been straws in the wind of such radicalisation for years, as a reaction to attacks by the LTTE on Muslims through the 1990s, and after the war, to the rise of Buddhist fundamentalism that began targeting Muslims.
- Sri Lanka, where nearly 10 per cent of the 22 million population is Muslim, has also not been insulated from the global spread of Wahabism.
- Mainstream Muslim parties, major players in Sri Lanka’s robust democratic political space, had managed to keep the radicals at bay all these years despite the failure of the political class to repair the ethnic faultlines.
- The targeting of Christians, who are an even smaller minority in Sri Lanka than Muslims, and in a manner similar to anti-Christian incidents in other parts of the world, also points to more than a local grievance.
- But it seems too early to say if the Easter bloodbath was the handiwork of ISIS, which would be searching for new spaces to compensate for its total loss of territory.
- Solving these puzzles will help Sri Lanka, also the rest of South Asia, to craft responses that ensure there will be no repetition of this nightmare.
Head Line: India’s response to China’s BRI linked to its territorial concerns
3) Mains Paper II: Bilateral, Regional and Global Groupings and agreements involving India
- India has, once again, decided to not participate in China’s second Belt and Road Forum (BRF) due on April 25, which is likely to be attended by around 40 heads of government.
- The admiration of India’s attempt to engage China through the Modi-Xi Wuhan informal meeting has faded away in recent months
- For instance, for the fourth time in a row, China blocked India’s bid to designate the Jaish-e-Mohammad Chief Masood Azhar as a global terrorist at the UNSC, the CPEC is going on regardless of India’s stern objections vis-à-vis PoK, and the balance of trade is still hugely in China’s favour.
Loopholes in criticism:
- First, thanks to the overpublicising of the Modi-Xi meeting, the expectation bar was set to an unrealistically high level.
- The Wuhan meeting was not about resetting India-China relations. It was an initiative to engage each other in a constructive dialogue.
- Wuhan and subsequent steps were intended to only manage the differences and prevent relations from getting derailed.
- The popular perception in the Indian media that because of Wuhan, China would not go ahead with the CPEC or support India on Masood Azhar and the belief in the Chinese media that it would lead India to join the BRI, are misinformed at best.
- Second, Wuhan was not a stand-alone dialogue, it was deeply embedded with the Doklam standoff.
- For the two countries, facing an eyeball-to-eyeball situation in Doklam, Wuhan came as an opportunity to re-start the dialogue.
- It was not a “Bhai-Bhai moment”, it was a moment to realise that the two have to co-exist and peacefully so.
- For India and China, that are dealing with the protracted boundary dispute for the past more than half-a-century, one meeting would not have changed much considering that even more than 20 rounds of dedicated border talks spread over several years did not lead to significant gains.
India’s response to the BRF:
- India’s response to the BRF is not linked with the Wuhan spirit.
- It is deeply rooted in its territorial sovereignty concerns vis-à-vis China and Pakistan.
- The Chinese investments in Pakistan are complicating the matter with each passing day.
- India’s main concern remains the much-controversial CPEC that passes through the PoK.
- Seen from that perspective it is clear that India would not have openly supported the BRI or the BRF, even if China had refrained from blocking India’s request at the UNSC.
China’s response to Indian concern:
- It is clear that China has been selective in addressing India’s concerns, and India too has adopted a similar approach.
- China is mindful of the fact that without India’s participation, BRI will remain an incomplete project at best.
- That is perhaps why China is keen to have another Wuhan-like dialogue.
- We do need more such meetings but only to facilitate the negotiation processes.
India’s pragmatic and balanced policy:
- Considering the asymmetry in its relationship with China, India needs to continue its pragmatic and balanced policy of engaging China through dialogues while actively looking for ways to deal with the possible scenarios.
- The quest to institutionlise the Quad and Indo-Pacific seems to be turning into reality with the restructuring of the MEA’s ASEAN Multilateral Division and the Indian Ocean Region Division into the Indo-Pacific Division.
- Trilateral dialogues and search for avenues to normalise and improve regular healthy conversations with China are the best way forward
- Self-doubt over peace initiatives or hesitation in moving forward on the Quad are detrimental to India’s interests.
One should not happen at the cost of the other. A careful balancing of both tracks will contribute to India’s stronger positioning in the region.