Slide in Global oil prices.

Slide in Global oil prices.

News: Brent crude prices have fallen sharply over the last ten days,in a major relief to the Indian economy. This decline in Brent Crude prices has been very sharp as Brent Crude is now trading at $90 per barrel from $110 per barrel in July end.

Impact due to rise in global oil prices:

  • Doubling of oil import bill: Since, India imports almost 85% of its oil and with rise in oil prices its import bill doubled to $119 billion at the end of  March 2022.
  • Change in global oil prices creates a chain of events: Like rise in oil prices leads to inflation, weakening rupee against the dollar and hurting stock market sentiment. 
  • Indirect impact of price rise is rise in edible oil prices, coal prices and also fertilizer prices as in manufacturing of fertilizer gas is used that accounts for 80% of all fertilizer production costs.
  • Enhanced import burden leading  to reduction in demand in the economy and that finally hurts or dampen growth. 
  • Rise in current account deficit and fiscal deficit as in most cases the government chooses to bear the burden of oil price rise by way of subsidies.

Global impact of softening in crude oil prices:

  • It points towards expectations of global slowdown: Future demand for crude oil may dip due to fears of recession in Europe and decline in demand from China as there are fresh Covid lockdown measures leading to  weakening of factory activity. Concerns over slowing demand gets further aggravated due to surprise rise in interest rates and  inventories in U.S.  For 2023 ,slightly higher demand and tighter supply forecasted by the US energy watchdog. OPEC also decided to cut production indicating an expectation of  decline in demand.

Impact on India:

  • Government ,Consumers and even the corporate will get big relief due to the sharp decline in crude oil prices.
  • Potential of higher Indian economic growth through revival in demand in the economy due to lower inflation levels and higher disposable incomes if oil continues to trade at lower levels.
  • Impact on equity and debt markets: Softening crude oil price will affect the index of companies across sectors, especially companies that are  sensitive to crude oil prices. These companies have witnessed a rise in their share prices due to decline in oil prices. 

Conclusion or Way forward:

  • Apprehensions: Decline in Oil prices may benefit oil marketing companies (OMCs), but it may not soften retail inflation as retail prices of fuel may continue to stay high. To get any meaning from decision on RBI policy rate crude oil prices must be sustained for a longer period of time.
  • Economic environment of India continues to remain challenging and interest rates by the RBI could continue to rise further.
  • Equity markets investors should invest with a long term focus in the Indian Economy even if decline in crude oil prices is positive for the Indian economy.
  • High interest rates are likely to peak over the next few months, so Debt investors should prepare themselves to lock into high interest rates. 

Source: Indian Express.

Article: Express Explained: In sharp slide in global oil prices, hope for easing of inflation in India

ArticleLink:https://indianexpress.com/article/explained/explained-economics/in-sharp-slide-in-global-oil-prices-hope-for-easing-of-inflation-in-india-8139770/

Yojna daily current affairs eng med 15 Sep

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