With crude oil prices climbing to fresh record high levels beyond the $75 per barrel mark, Nomura sees India as a major loser along with Philippines and Turkey in emerging markets. According to the firm, every 10/bbl rise in prices will negatively impact the country’s current account deficit by 0.4%. Notably, India’s central bank RBI’s (Reserve Bank of India) baseline scenario assumes crude oil prices (Indian basket) to average around $68 a barrel in FY2019. Robert Subbaraman, chief economist and head of global markets at Nomura told CNBC TV18 that rising inflationary risks can push RBI’s rate hike. He sees the increase in crude prices to impact inflation by 30-40 points and hurt growth.
In its latest Monetary Policy Review, the RBI has cautioned about volatile crude oil prices impacting inflation. “International crude oil prices have become volatile in the recent period, with a distinct hardening bias in the second half of March, even as the increase in shale production was more than expected. This has adversely impacted the outlook for crude oil prices,” RBI said adding that there is upside risk to inflation. Among various other factors which uncertainties about inflation, elevated and volatile crude oil prices is a major factor.
A recent Deutsche Bank report said that RBI may hike interest rates by 25 bps on the back of rising crude oil prices. “We now see RBI hiking the repo rate by 25bps in June itself (to 6.25%), reversing the 25bps rate cut of August last year, and likely hiking another 25bps by the end of this calendar year or early next year,” Kaushik Das, chief economist, Deutsche Bank in a recent note.
Noting the reasons for hardening of crude oil prices, RBI says that increase in shale production was more than expected. “This has adversely impacted the outlook for crude oil prices. Third, on current assessment, Indian domestic demand is expected to strengthen during the course of the year. Fourth, the statistical impact of an increase in HRA for central government employees under the 7th CPC will continue till mid-2018, and gradually dissipate thereafter.