Reserve Bank of India (RBI) Governor Shaktikanta Das is scheduled to announce the central bank’s monetary policy decision tomorrow (October 6) following a two-day review that began on October 4. Analysts in the financial world widely anticipate that the RBI will maintain unchanged interest rates, given the backdrop of easing inflation. However, the central bank is likely to maintain its hawkish policy stance on Friday. Despite the optimistic outlook, the Indian economy faces new challenges in the form of global headwinds, particularly the surge in crude oil prices and surging US bond yields.
International crude oil prices recently reached 10-month highs, propelled by a decision from Saudi Arabia and Russia, both members of the Organization of Petroleum Exporting Countries and its allies (OPEC+), to extend voluntary production cuts of 1.3 million barrels per day until the end of the year. This decision has raised concerns about the global oil supply, contributing to the upward pressure on oil prices.
OPEC nations currently account for approximately 30 percent of the world’s crude oil production, with Saudi Arabia being the largest producer within the cartel, contributing over 10 million barrels per day. OPEC+ as a whole pumps around 40 percent of the world’s crude, emphasizing the significant influence of their policy decisions on global oil prices.
The production cuts initiated by Saudi Arabia and Russia have introduced fresh inflationary pressures to the global economy, prompting central banks worldwide to consider raising interest rates. Last week, Brent crude oil prices nearly touched the $98 per barrel mark after US government data revealed a decline in US crude stocks.
The impact of high oil prices on the Indian economy is a matter of concern. India, being a net importer of crude oil, relies on imports to fulfill up to 85 percent of its energy requirements. If international crude oil prices continue to rise, India may face a heavier import bill throughout the year.
Fluctuations in oil prices can also influence the price-setting and wage-setting mechanisms in the economy by altering the inflation expectations of businesses and households. While the impact is typically short-lived and reverts to the mean quickly, it can have significant implications.
Higher crude oil prices can lead to increased production and transportation costs across various sectors, affecting their profitability and competitiveness. This, in turn, can reduce consumers’ disposable income, impacting their demand for goods and services.
Despite the recent surge in global crude oil prices, analysts suggest that the RBI’s rate-setting panel may not be swayed by this development, given India’s strong macroeconomic indicators. While Brent crude prices spiked to nearly $96 per barrel, they have since corrected to around $85 per barrel. The focus of the RBI’s Monetary Policy Committee (MPC) is likely to remain on inflation, given the recent uptick in global crude oil prices and sustained economic growth.
As RBI Governor Shaktikanta Das unveils the central bank’s monetary policy decision, the specter of rising global oil prices looms large, posing challenges to India’s economic stability and monetary policy direction. The MPC’s decision will be closely watched for its assessment of these factors and its implications for the Indian economy.
