Crisil Research expects another 22% increase this fiscal, taking the average price of the Indian basket to $70-72 per barrel.
CRISIL believes there is a possibility of another rate hike if crude oil prices stay at current levels. While monetary policy will stay vigilant, further policy rate action will most likely only be effected if the rise is perceived as being sustainable, with pressures suggesting seepage into generalised inflation through stronger domestic demand.
Last fiscal, global crude oil prices rose 18% on average. Crisil Research expects another 22% increase this fiscal, taking the average price of the Indian basket to $70-72 per barrel. The first two months of this fiscal have seen prices average $74 per barrel — even hitting $80, the highest since November 2014 — fuelled by geopolitics. While this raises concerns, the shock to CPI inflation could be less severe than it has been in the past.
Higher market linkages of retail fuel prices bring about larger first-round impact of rising prices on inflation. And that is clearly visible for now. But persistent transmission of these into generalised inflation will depend on how robust the domestic demand revival is. With improvement in capacity utilisation, the output gap is narrowing, RBI noted.
Moreover, despite keeping policy rates on hold for the last 10 months, market interest rates had already begun to witness de facto tightening. The risk-free rate in the economy — the 10-year government security yield — has jumped 60 basis points (bps) on average so far in 2018 (and about 15 bps since the last policy meet) on fears of fiscal slippage. Meanwhile, with somewhat tighter liquidity conditions in the banking system, rates on commercial paper borrowings have hardened nearly 90 bps so far in 2018, and 40 bps since the last policy.
Meanwhile, banks also have started raising their deposit and loan rates after a nearly four-year rate easing cycle. Hardening of market interest rates in India mirrors a similar trend in Asia where some central banks (South Korea, Malaysia and Indonesia) have begun raising their policy rates in response to weaker currencies and/or tighter global capital flows.
The writer is MD and chief economist at Crisil