Oil prices

Oil prices

Subject: Economy

Context: Crude oil’s effectiveness as a gauge of economic growth was once again on display during the pandemic. Last March, as the scale of the pandemic was first revealed, Brent oil futures plunged to $22. But with the large stimulus roll-out and gradual recovery in growth, prices too moved higher to $55

Impact of rising crude oil prices on India

• Impact is on trade deficit: The Indian economy has been able to cope with crude oil prices moving in the $50 to $70 range since 2014. It’s only when prices spike materially beyond $70 that some negative ramifications are seen impact is on trade deficit.
• Inflate the import bill: India is a net crude oil importer, depending on import to meet over 77 per cent of domestic demand. The share of petroleum products in India’s imports is over 25 per cent in normal times. Therefore, the surge in crude oil price tends to inflate the import bill, widening the trade deficit.
• Impact the rupee’s movement. As the accompanying chart shows, the rupee has depreciated against the dollar in periods of oil price surge. The same trend is playing out over the past year as increasing oil prices is making the rupee weak.
• Inflation: With fuel and light having a significant weight in the CPI basket, the surge in crude oil prices tends to make the CPI spike higher as well. This is being witnessed in recent months. However, once global crude oil supply is ramped up, both rupee and the CPI could get some relief.