The recent rise in crude oil prices following the US decision on Monday to not grant exemption from sanctions to the Iranian oil importers including India, may stoke India s headline inflation going forward. It would eventually add to financial woes of common people as they will have to shell out more to fulfil their household needs.
As India is a huge consumer of crude oil and imports more than 80 percent of its oil needs, the rise in crude oil prices directly affects the consumers. It is also one of the third largest importers of crude oil from Iran after China and Japan. There has been a rally of around 4% in crude oil prices in the last ten days. Crude oil prices touched a six-month high this week.
Petroleum — a derivative of crude oil — is one product which is used in almost all the household products including home appliances and packaging materials. Consumer items including air conditioners, televisions, furniture, bottles, food and beverage containers, biscuits and noodles may get expensive with the surge in oil prices.
Other things including travel and building material — cement will also get costlier as the petrol prices increase in the near future. Although, we have not yet seen any substantial rise in fuel prices on account of general elections as the ruling party would not like to upset the potential voters in this crucial time. There has only been minor fluctuations in the prices of petrol and diesel across the major cities.
If the oil remains at $75 per barrel or higher on a sustained basis, there will be a negative impact on headline inflation. Though the RBI reduced their inflation target by 40 basis points in its last policy, they will be compelled to look at an increase in oil prices in next policy to see if there would be an adverse impact on the inflation or the prediction of RBI on inflation, Dhawal Dalal, Chief Investment Officer with Edelweiss AMC said in an interaction with ET Now.
The Reserve Bank of India in its last policy had revised the CPI (retail) inflation downwards to 2.4 per cent for Jan-Mar quarter of FY19 as against an earlier projection of 2.8 percent and 2.9-3 per cent for the first half of current fiscal (against 3.2-3.4 per cent), with risks broadly balanced.
Despite the rally in crude oil essentially helped by supply side headlines, this is nevertheless feeding through into a rise in product prices of oil importing nations. Particularly for India, continued uptick in Brent could weigh on the RBI MPC reaction function especially amid other existing potential risks of uneven monsoons, uptrend in food inflation, and fiscal reflationary impulses. We note that RBI has taken India crude basket at US$67/bbl for FY20 for its inflation forecasting, Madhavi Arora, lead economist at Edelweiss Securities, FX and Rates told Financial Express Online.
Today, while brent crude oil was at $74.14 per barrel, 0.50% lower than the previous close, the WTI crude oil was at $65.91 per barrel, 0.59% lower than the last close.