The Russia-Ukraine war has shot up crude oil prices owing to concerns over supply disruption as the United States and European Union consider a Russian oil import ban even as the supply of Iranian oil to the global market remains uncertain.
Brent crude oil prices reached near $130 a barrel on March 7, its highest since 2008. Most brokerages and analysts believe that the Russia-Ukraine war and its fallout will keep crude oil prices elevated for a longer period.
A steep rise in crude oil prices is bad news for India as the country is one of the largest importers of crude oil and elevated prices will exert pressure on its fiscal books, drag the currency lower and shoot up inflation.
"We estimate the Indian economy to incur an additional $70 bn burden (1.9 percent of GDP) versus FY22 levels at an average crude price of $120/bbl. Also, we see meaningful upside risks to inflation and downside risks to corporate profits through increased pressure on margins and volumes both," said Kotak Securities.
Kotak sees the possibility of crude prices staying elevated in the next 6-9 months due to large imbalances in the global crude oil markets.
RBI's quandary
The Reserve Bank of India (RBI) in its last policy meet had reiterated its focus towards growth and thus maintained the status quo on lending rates and policy stance. RBI had highlighted that growth was still in its nascent stage and a hike in rate will not be suitable for the economy at this juncture.
However, as the primary responsibility of RBI MPC is to keep inflation around 4 percent, concerns have started to grow about how long RBI will be able to keep the rates low and stance accommodative.
"India currently imports 85 percent of its crude oil. A general inflationary trend will be triggered by the cascading effect of rising fuel costs. In January, Consumer Price Index (CPI) which measures retail inflation, crossed the RBI's target range. High commodity costs were cited for the increase. According to industry estimates, a 10 percent increase in crude oil prices contributes about 10 basis points to CPI inflation," Kshitij Purohit, Lead Currency & Commodities at CapitalVia Global Research, observed.
Brokerage firm ICICI Securities pointed out there is little need for a roll-back of broad-money growth in India.
"Brent crude prices are uncorrelated with headline CPI inflation in India (because fuel and light have only a 6.84 percent weightage in the CPI), but a generalised surge in commodity prices will likely keep India’s CPI inflation above 6 percent year-on-year (YoY) in March-April 2022, nudging the RBI to raise the repo rate by 50bp in April-July 2022," said ICICI Securities.
"With headline inflation already slightly above its target range (and likely to remain above it in Mar-April 2022), we believe that the RBI will be obliged to bring forward its rate increases. We now expect 50bp of increases in the repo rate in Apr-July 2022 – whereas we were previously expecting those hikes to have come in Aug-December 2022," ICICI said.
The brokerage firm believes with fuel prices moderating sharply in the latter period, and the earlier rate hikes reining in domestic demand, CPI inflation will stabilise in the 4-5 percent YoY range in Aug-Dec 2022, obviating the need for further increases in the repo rate.
Tapan Patel, Senior Analyst (Commodities) at HDFC Securities said the recent surge in oil prices may trigger a hike in fuel prices in India. In addition, the inflation worries may also make the central bank think about monetary policy changes.
Heena Naik, Research Analyst - Currency, Angel One, is of the view that the RBI MPC may feel compelled to hike the rates sooner than expected due to high inflation.
"For India, higher crude prices are not good since it puts upwards pressure on inflation. The chances of the inflation rate moving past the RBI’s target range are high. To curb this mismatch, the committee may have to tighten monetary policy earlier than expected," said Naik.
RBI has a tight rope to walk on in its next policy meet in April. As it seems likely that the crude oil prices will remain elevated for a protracted period, RBI may be forced to bite the bullet on rate hikes soon.
