India could be in for a very crude shock as the US revokes waivers to purchase oil from Iran

• The Trump administration is reportedly planning not to renew waivers granted to seven countries, including India and China, to purchase oil from Iran.
  
• The waiver was extremely beneficial for India, coinciding with a dramatic resurgence of the Indian rupee amid a decline in oil prices.
  
• The revocation of the waiver comes at a crucial time for India. Polling for general elections is currently underway and any short-term disruptions in oil supply or increasing prices are likely to influence voters’ minds.
  

India’s windfall from US waivers on sanctions on the import of Iranian oil may end soon.

The Trump administration is all set to revoke waivers granted to seven countries, including India and China, to purchase oil from Iran, sources told Bloomberg. Having been granted in November 2018, they are set to expire on May 2nd. The waiver was extremely beneficial for India, coinciding with a dramatic resurgence of the Indian rupee amid a decline in oil prices.

India was able to pay for Iranian oil in rupees, which prevented it from having to convert its currency into dollars. Moreover, the country also offered oil at lower prices than other countries in the Middle East like Saudi Arabia. That was in addition to extended credit terms, making it an attractive seller to India.

The fall in domestic fuel prices also drove inflation to multi-year lows, paving the way for two back-to-back rate cuts by the Reserve Bank of India in February and April 2019.

The imposition of sanctions on Iranian oil purchases will also likely curtail the supply of oil in global markets, pushing prices up.

Major suppliers like Saudi Arabia and the UAE will be expected to plug the gap but there’s only so much they will be able to do. The supply crunch will also be exacerbated by sanctions on Venezuela.

Iran reportedly supplied 1.7 million barrels/day of oil in March 2019 to Asian importers, led by China, South Korea and India - the latter securing 258,000 b/d. In fact, in 2017-18, India sourced 9% of its oil from Iran.

The revocation of the waiver comes at a crucial time for India. Polling for general elections is currently underway and any short-term disruptions in oil supply or increasing prices are likely to influence voters’ minds.

The rupee hit a six-week low yesterday and bond yields increased as oil prices rose by more than 2% to a level not seen since November 2018. In the year to date, oil prices have rallied around 30%.

Higher oil prices means a higher import bill for India, a higher fiscal deficit and a continued fall in rupee and difficulties in the aviation sector. This will likely drive inflation upwards, stalling the RBI’s plans of another possible rate cut at its next meeting after elections.


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