Impact Of Rising Oil Prices On India

Question 1

The surge in oil prices couldn’t have come at a worse time for India.

Asia’s No. 3 economy faces a wider trade deficit, a worsening of stretched government finances, and slower economic growth if oil prices remain stubborn at the current level.

Answer 1

India’s central bank estimates oil at $78 a barrel would shave off 10 basis points from its 7.4 percent forecast for gross domestic product. Moreover, it expects costly crude could stoke inflation by 30 basis points, underpinning expectations that monetary policy will turn more hawkish.

Question 2

The pretty hawkish RBI minutes released last week give credibility to our previous stance that inflationary pressure will rise faster than expected, which will force it to hike faster than expected.”

The Reserve Bank of India aims to keep inflation around 4 percent. Pressure to tighten could also increase if the rupee – already Asia’s worst performer this year – sinks further and pushes up India’s oil-import bill.

Answer 2

Another risk stems from government finances. Any slippage risks the wrath of global rating companies, most of whom put India near the so-called “junk” status, as well as anger bond investors.