Will India also be forced to seek loans from the IMF

An oil rig operating in Russia

August 6, 2022

Last week, as Bangladesh joined Sri Lanka and Pakistan in seeking loans from the International Monetary Fund (IMF), global investors and bankers analyzed if, and when, their neighbor India may also be forced to seek a loan. The three South Asian countries have applied for IMF loans to help pay for critical imports of diesel, gasoline, cooking gas and food. They are also seeking loans from the Asian Development Bank for longer term projects.

The economies in South Asia, as well as in numerous other countries, especially in Africa, have been hit hard by rising prices of crude oil, refined oil products, food, and other commodities. The raise in prices, especially for crude oil and food items, were triggered by Russia’s invasion of Ukraine in February this year.   

But, despite rising energy import costs, India has largely avoided a major economic and political crisis in part because it is mostly self-sufficient in food grains, unlike Sri Lanka where massive protests demanding food led to a change of government.

India consumes roughly 175 million cubic feet of natural gas and 5.2 million barrels of crude oil a day. It imports about half of the gas and nearly 9 out of 10 barrels of the oil it consumes: about 25 million metric tons of liquefied natural gas (LNG) a year and 4.5 million barrels of oil per day. Part of the oil consumed is refined and exported as gasoline and other products.

LNG prices have risen more than 400% since mid-2021 to about $40 per million British thermal units. And, so far in 2022, India is paying at least 50% more for about three quarters of its oil imports than it did in 2021. The Brent Crude Oil benchmark price jumped and stayed over $110 from late February to mid-July this year, following Russia’s invasion of Ukraine, up from about $70 a barrel in December 2021.

Every $1 increase in the price of oil boosts India’s annual import bill by $2.1 billion, according to an analyst at Nomura Securities. The hit to the Indian economy from high energy prices is softened a bit by the government buying crude oil from Russia at a 30% discount to global prices. Currently about a million barrels of India’s imports come from Russia. With Brent crude recently trading around $100, the discounted imports from Russia will enable India to pay about $12 billion less on its annual imports of the commodity.

In large part due to the continuing reliance on crude oil and LNG imports, and their rising global prices, in the first four months of this fiscal year 2022-2023, India’s foreign trade deficit rose sharply to a total of $100 billion. This compares to a deficit of $60 billion for the entire pre-pandemic 2018-19 fiscal year.

So far this year, the rapidly rising trade deficit, combined with the net outflows of $29 billion in foreign capital from the Indian stock market, has led to a 5% drop in the Indian Rupee against the United States dollar – it currently trades around Rs.80 to the dollar.

The Reserve Bank of India, the country’s central bank, has been using its foreign currency reserves to buy Rupees and hold the exchange rate to around Rs. 80 to the dollar. Also, the Indian government is seeking to make payments in Rupees for Russian oil imports as well as for imports of goods from other countries. Global trade in crude oil and LNG are settled in U.S. dollars. The chances of Russia and other countries agreeing to transact major trade deals in Rupees are small. Even China, the World’s second biggest economy, has so far been unable to get most of its trading partners to settle major trades in Yuan.

The Indian central bank also announced measures to attract foreign capital as part of its efforts to strengthen the Rupee. The measures include making it easier for foreign investments in India’s debt market as well as for Indian businesses to seek foreign commercial loans. But foreign investors and bankers are instead focused on India’s foreign currency reserves.  

India has about $570 billion in foreign reserves, largely accumulated due to remittances by Indians working abroad, especially in the Middle East countries. High energy prices have boosted economic growth in Saudi Arabia and other oil and gas-exporting Middle East countries. This has led to more - and stable - jobs for Indians in those countries and, in turn, higher remittances by them to their families in India. So, this inflow could offset part of the rise in the trade deficit.

While global financial analysts do not anticipate India seeking loans from the IMF in the near future, they expect further declines in the Rupee, according to a CNBC report. The Rupee will continue to weaken, analysts say, because of a draw down of the foreign reserves due to the widening foreign trade deficits, continuing outflow of foreign capital and the central bank’s use of foreign currency to support the Rupee.   

According to a NDTV.com report, Shaktikanta Das, the central bank’s governor, described the use of foreign currency reserves to support the Rupee as similar to buying "an umbrella to use it when it rains.” By 2030, India’s LNG and crude oil consumption are expected to rise by about 50%. This increased demand will have to be met largely with imports since the prospects of a major jump in domestic production are slim. By then, will the central bank’s umbrella remain strong enough in case there is a hurricane of rising oil and gas prices?

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