RBI may slam brakes on interest rate cut spree after Donald Trump’s Iran oil blow

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Updated: April 24, 2019 12:13:16 PM

The central bank has to remain watchful also the sanctions would coexist with the trade tensions between the US and China, the report added.

The Donald Trump administration has ended the 6-month exemption given to several countries from unilateral US sanctions on Iranian oil exports. This may prevent the RBI monetary policy committee (MPC) from announcing a further rate cut in its upcoming meeting in June, said a report.

The rise in crude oil prices due to imposition of US sanctions would also require RBI to monitor the prices closely and if the crude oil price remains around $75/barrel for another month, the MPC may postpone a rate cut in the June bi-monthly committee meetings, said CARE Ratings in a report.

The central bank has to remain watchful also the sanctions would coexist with the trade tensions between the US and China, the report added.

In its latest bi-montly monetary policy report released earlier in April 2019, the Monetary Policy Committee has stated that the outlook for crude oil prices is hazy with both risks on the upside and downside.

Further, the impact of increased oil prices on inflation will vary depending upon the extent to which crude oil price goes up and the extent to which the government allows the pass through of crude oil price to the consumer. This will also impact the monetary policy decisions in the future.

In extreme cases, a 10 percent increase in crude oil prices can lead to 1 per cent in the WPI and around 0.24 percent CPI inflation, said CARE Ratings report.

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Crude oil remains central to India’s growth as it makes up for around 25 per cent of its imports in a year, which help to fulfil 80 per cent of the country’s energy requirement. Iran is the fourth largest supplier of crude-oil in India.

“A permanent increase in crude oil prices by 10 per cent under ceteris paribus conditions could translate into the current account deficit increasing by 0.4-0.5 per cent of GDP,” said CARE Ratings in a report.

An embargo on importing oil from Iran would mean sourcing the same from other countries which may not provide the same benefits as were provided by Iran in the form of price and credit facility.

Moreover, a sustained increase in the price in the range of $70-75/barrel or higher would move the rupee down by 3-4 per cent on an annual basis given that the dollar has already started strengthening in the world market, according to the report.

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