A $10 intra-day plunge in crude oil prices on Tuesday raised a glimmer of hope for policy makers, offering them prospects of the maneuvering space needed to sustain growth while keeping inflation under check.
Markets cheered the news and the 30-share benchmark index of the Bombay Stock Exchange — the Sensex— surged 551 points, 3.8 per cent to close at 15,089.
Crude has been on a slide for nearly eight weeks as speculation, which had earlier driven its prices up, took a backseat amid signs of slackening oil demand in a slowing world economy.
On Tuesday, October delivery fell to $105.46 a barrel on the New York Mercantile Exchange, down more than 40 per cent from an all-time high of $147 per barrel reached two months ago.
Tuesday’s fall was sharp as crude price had risen over the past few days amid worries that a hurricane in the south of US could hit oil rigs and production of crude in the region. But that didn't happen.
“Market was rejoicing the softening of oil prices as the hurricane Gustav had the minimal impact on production capacity of Gulf of Mexico,” said Gopal Agarwal, head of equity, Mirae Asset management.
If the slide continues, or that there is no immediate reversal, it could persuade monetary authorities to go easy on interest rates. Central banks worldwide have repeatedly increased interest rates as surging crude prices stoked inflation.
Back home, where inflation is closing in on a worrisome 13 per cent, high interest rates have already hurt growth. The Indian economy grew 7.9 per cent through the April-June quarter, down from 9.2 per cent in the preceding quarter.
“This (fall in crude prices) will boost up the interest sensitive sectors, especially the banking, capital goods and real estate,” said Agarwal.
Easing crude prices mean lower subsidies on the government’s budget and less strain on the finance of oil companies. “The slump in crude prices should come as a big relief to policy makers as it would offer more space. This would particularly help contain the fiscal deficit,” said DK Joshi, principal economist with credit rating agency Crisil.
“It should also come as a relief to the industry that was feeling stressed out due to high prices of non-administered petroleum products such as furnace oil, naptha and jet fuel.”
The softening of oil prices will improve the fiscal situation of the country. “If oil stabilises around $100 per barrel the overall inflation will come down drastically,” said Manish Bandi, vice president, India Infoline.
That said, Petroleum Minister Murli Deora has ruled out any immediate cut in retail prices of petrol, diesel and cooking gas, because even at $100 crude prices are still high.
Moreover, the incremental supply of oil is not coming. So, if the oil prices come down, it will be because of reduction in demand, and not because of increase in supply. In the longer run, the price outlook remains unclear.