The proposed US sanctions legislation targeting countries that buy Russian crude oil could add pressure to ongoing India-US trade negotiations, while also raising concerns over India’s crude import costs and the rupee, according to Bank of Baroda Chief Economist Madan Sabnavis.
The proposed legislation has made the outcome of the India-US trade deal more important for India as the country continues to depend heavily on crude oil imports. Sabnavis said India would need to assess its sourcing strategy based on the outcome of negotiations with the US and developments in global oil markets.
Speaking about the latest US measures, Sabnavis said the developments make it more important for India to reach an understanding with Washington. “It becomes even more critical how we negotiate a deal with the USA in light of this development,” he said. He added that discussions between the two countries are already underway and a solution is expected to be explored through the ongoing negotiations.
The US Senate on Friday passed a Russia sanctions bill that could impose tariffs of up to 100 per cent on countries that purchase Russian crude oil and natural gas. India and China are among the countries identified in the legislation as being of concern over purchases of Russian energy.
For India, the issue is significant because crude oil remains one of the country’s largest import items. Any major change in the availability or cost of Russian crude could force Indian refiners to source more oil from other markets. This could increase the overall import bill, particularly if global crude prices also rise.
Sabnavis said India could look at other sources of crude depending on the outcome of discussions with the US. However, he noted that there is no immediate pressure on the economy as crude oil prices are currently around USD 80 per barrel.
“Depending on the negotiations with the US, we will have to import from other countries. As we are seeing today, the crude price is stable at 80 or so. There is no immediate problem,” he said.
The bigger concern could emerge if the geopolitical situation worsens and global oil supplies face disruption. A sharp rise in crude prices would increase India’s import expenditure and could put additional pressure on the Indian rupee. Higher energy costs could also affect India’s current account position and increase inflationary pressures.
“The issue will be if war escalates and supplies are blocked. Import bill will go up and put pressure on rupee,” Sabnavis said.
The economist also pointed to Foreign Currency Non-Resident (FCNR) deposits as a factor that could provide some support to India’s external position. However, he said a sustained rise in crude prices would still have an impact on the country’s current account deficit.
“FCNR will provide counter balance here. But CAD gets impacted for sure,” Sabnavis said. He added that the impact may currently remain limited and could be around 0.1 to 0.2 per cent of GDP.
The US Senate passed the sanctions legislation with an 86-11 vote. The proposed measures come at a time when India and the US are continuing negotiations on a trade agreement, with tariffs and market access remaining important issues between the two countries.
For India, the latest developments add another layer to the ongoing trade discussions. The government will need to balance energy security, affordable crude supplies and broader trade interests while assessing the potential impact of the proposed US sanctions.
