The US-led coalition’s air strikes against Islamic State militants in Syria could push up oil prices, fan inflation and dash hopes of lower borrowing rates ahead of the festival season, just when the Indian economy was showing signs of clawing out of its deepest slump in 25 years.
The unrest in oil-rich West Asia isn’t good news for millions of Indians who have been looking forward to lower fuel bills amid signs that petrol prices could come down further, as early as next week, aided by plunging crude oil prices that recently touched $97 a barrel — the lowest in two years.
This had triggered hopes that the creeping increase in monthly diesel bill may also end soon, as the government could anytime announce de-regulation of diesel prices on the back of declining global crude oil prices.
The crisis in Syria and Iraq, India’s second-largest crude oil supplier after Saudi Arabia, and a possible hardening of oil prices, however, could turn the clock back.
For a start, it could mean that India will need to shell out more cash to import fuel, and this in turn will raise prices of transporting goods, leading to higher inflation. And high inflation means that the RBI will hesitate to cut interest rates, a step needed to boost growth.
So, consumers need to keep paying large chunks of their income every month towards repaying housing loans, even as the cost of food and fuel rises.
And it’s not just households that could take the hit. Companies that import raw materials will be hurt badly if crude prices harden and the rupee weakens because of higher dollar demand.
The rupee on Tuesday fell 12 paise to close at a one-week low of 60.94 against the dollar. India, the world’s fourth-largest oil consumer, imports around 190 million tonnes of crude oil a year — costing $145 billion a year, or more than a third of its total import bill.
With every dollar increase in oil prices, the government’s oil import bill goes up by approximately Rs. 4,000 crore. A $2-4 per barrel increase in crude oil prices on an average would mean increasing India’s oil import bill by Rs. 8,000 crore to Rs. 16,000 crore.
While higher oil prices will have a knock on effect on inflation, it also can weaken the rupee as demand for dollars go up to meet import payment obligations.