Following a two-day review that started on October 4, Reserve Bank of India (RBI) Governor Shaktikanta Das will announce the institution’s monetary policy decision tomorrow (October 6). On Friday, the central bank is expected to continue its aggressive policy stance despite India’s softening inflation report, according to the majority of analysts on D-Street. The economy is also facing new dangers from global headwinds including rising US bond rates and increasing crude oil costs.
The Organization of Petroleum Exporting Countries and its Allies (OPEC+) members, Saudi Arabia and Russia, extended voluntary production restrictions of 1.3 million barrels per day through the end of the year, heightening supply worries in the oil markets, sending global crude oil prices soaring to 10-month highs.
Today, around 30% of the world’s crude oil is produced by OPEC countries. Saudi Arabia produces more than 10 million barrels of oil per day, making it the cartel’s largest oil producer. Around 40% of the world’s crude is produced by OPEC+, and its political actions may have a significant effect on oil prices.
With central banks already on track to hike interest rates before December, the output reductions by the Russian Federation and the Kingdom of Saudi Arabia have increased inflationary pressures for the global economy. After US official statistics revealed that US oil stockpiles dropped by 2.2 million barrels last week to 416.3 million barrels, Brent soared to about $98/barrel last week.
What is the economic impact of increasing oil prices on India?
India’s GDP expanded 7.8% year over year in the April–June quarter, which was its fastest rate in a year. However, experts warn that future development may be constrained by a five-year low in monsoon rainfall. The economy grew at its fastest rate in four quarters in Q1FY24.
However, India, a net importer of crude oil, must consider the economic consequences of the world oil supply in order to maintain price stability. As much as 85% of India’s energy requirements are met by imports; thus, if global crude oil prices continue to rise throughout the year, import costs may increase.
By modifying the inflation expectations of businesses and people, unexpected changes in oil prices can also have an impact on how prices and wages are established throughout the economy. As a result, domestic economic activity declines as a result of the shock.
Various industries’ profitability and competitiveness will be impacted by higher production and transportation costs due to higher crude oil prices. As a result, customers’ disposable income will decrease, which will impact how much they would spend on products and services.
Will increases in the price of crude oil affect the RBI MPC’s choice?
According to analysts, India’s solid macroeconomic data may have more of an effect on the RBI’s rate-setting panel than the recent increase in global crude oil prices. Brent crude has now drastically corrected to $85 per barrel after rising to $96 earlier. According to news agency Reuters, US West Texas Intermediate crude futures were 67 cents (0.8%) down at $83.55 while Brent crude oil futures dropped 68 cents (0.8%) to $85.19 a barrel.
Russian and OPEC production cutbacks will keep petroleum prices high. Analysts claim that demand will have an impact on the price in addition to supply, thus it is important to closely monitor global growth.
If the Chinese GDP remains sluggish, which has an adverse effect on global growth, oil demand will be weak, which will constrain prices. The increase in crude price is unlikely to have an impact on MPC. According to Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the MPC would keep the rates and maintain the stance in its meeting this week.
However, the recent increase in global crude oil prices and steady economic growth are expected to preserve the MPC’s emphasis on inflation. Analysts do not anticipate the central bank to modify its position from “withdrawal of accommodation.”
