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Black Friday: Oil fire fuels prices, guts market

business Updated: Jun 28, 2008 08:22 IST
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This is one nightmare that just refuses to end. On Friday, inflation soared to a 13-year high of 11.42 per cent, crude oil prices spiked to a record peak of $142 a barrel, and the Sensex crashed 620 points to close at a 13-month low.

Through all of this, not a word came from the government. The silence was deafening — even though Finance Minister P. Chidambaram and Commerce Minister Kamal Nath had said only a day earlier that they expected inflation to stay in double digits for at least a couple of months more.

Investor sentiment worldwide took a hit after OPEC’s announcement on Thursday that crude prices could touch $170 a barrel. Markets everywhere from the US to Japan tanked heavily, with only Brazil and Spain bucking the trend on Friday.

Policymakers everywhere are struggling with trying to balance growth with oil-fired inflation. This includes India, which imports nearly 75 per cent of its crude requirements. “The world economy is seeing the greatest risks of stagflation since the 1970s,” said Yiping Huang, Hong Kong-based analyst with Citigroup Global Markets.

In India, the crunch on the common man has been intensified by the rising cost of borrowing, as banks have taken the RBI’s cue to raise interest rates. While the central bank’s attempt has been to control inflation by squeezing money supply, the move has raised the cost of doing business, and is likely to reduce fresh investments by companies.

Retirees, however, can breathe a little easy. Deposit rates, and hence returns on their savings, have risen.

If global crude prices continue to rise, even higher inflation and a few more rounds of interest rate hikes by RBI are not ruled out, say analysts.

“Central banks are already more hawkish, as inflation becomes a bigger problem in Asia,” Yiping said. “Interest rates should rise all around the region.”