International crude oil prices have fallen for the last 10 days. Crude oil, which traded around $110 per barrel at the end of July, has now fallen below $90 per barrel.
The decline has been very sharp in the last ten days. Because it was trading at $88 a barrel on Thursday, down 13%.
This is a big relief for India which imports almost 85% of its oil. A reduction in crude oil prices could reduce a portion of inflation.
What is the reason?
Crude oil prices fell about 4% on Wednesday. Earlier, the decline came despite OPEC oil group members announcing they would cut supply by 100,000 barrels per day from October in a bid to prop up prices.
This is the latest sharp decline as prices have eased over the past two months. Economic fears of a slowdown in Europe and falling demand in China are also part of the reason.
These factors may reduce the demand for crude oil in the future.
Meanwhile, market participants say OPEC countries’ decision to cut production is a sign that lower demand is expected to lead to further declines in prices.
Weak economic signals from China, interest rate hikes and a sudden rise in US inventories fueled economic concern.
The US Energy Information Administration predicts demand and supply will be slightly higher in 2023. We expect crude oil prices to trade at an expectation of $80-$84 per barrel,” said Tapan Patel of HDFC Securities.
What does this mean for India?
India imports nearly 85% of its crude needs. In the year ending March 2022, oil import bills doubled to $119 billion due to price hikes.
The rise in import tariffs not only leads to inflation and widening of the current account deficit and fiscal deficit, but also weakens the rupee against the dollar and affects stock market sentiment.
The rise in crude oil prices has an indirect impact on India as it leads to rise in cooking oil prices, coal prices and fertilizer prices.
This is because they use gas as raw material. 80% of all fertilizer production costs come under the General Accounting System (GAS).
So if a rise in crude oil prices leads to an increase in the import burden, it also leads to a decrease in demand in the economy, which affects growth.
If the government wants to shoulder the burden through subsidies it will lead to a higher fiscal deficit.
In that sense, falling crude oil prices is a big relief for all stakeholders – government, consumers and even corporates.
If oil continues to trade at low levels, inflation will fall, leading to higher disposable income and thus higher economic growth.
Will RBI stop interest rate hike?
Inflation declined to 6.71 in July from 7.79 in April. This trend is expected to continue in line with the fall in crude oil prices and other commodities.
With oil marketing companies (OMCs) bearing the brunt of higher oil prices, it depends on whether the government and oil companies will take steps to lower prices for consumers following the fall in global crude prices, experts say.
“I think this will give oil companies a breather and I don’t see a drop in retail inflation due to lower crude oil prices as retail fuel prices may continue to rise,” said Madan Sapnavis, chief economist at Bank of Baroda.
If so, the RBI may raise interest rates in the upcoming monetary policy meeting. Because we have to wait for a long time for crude oil prices to continue to fall, which will be reflected in retail fuel prices and inflation will come down.
What effect will this have on the stock and credit markets?
The Mumbai Stock Exchange (BSE) Sensex has gained 1.5% in the last four trading sessions. Among other factors, falling crude oil prices also played a role in the index’s rise.
Because the share prices of companies in the crude oil sector have seen a rise. Market participants also believe that a revival in demand in the economy will lead to a revival in earnings for companies in the next two quarters.
If the decline in crude oil prices is positive for the Indian economy and equity markets, investors should invest with a long-term focus.
Debt investors should also brace themselves now as higher interest rates peak in the next few months.
The 10-year yield is currently around 7.14%. Therefore, the Reserve Bank of India (RBI) may continue to raise interest rates and thus interest rates may rise further.
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