Crude to exert upward pressure on policy rate

The upward trend in crude oil prices in the recent past will also exert immense weight on Monetary Policy Committee's (MPC) decision on policy rate today, said economists.

Consistent inventory drawdowns in the past few weeks had pushed crude prices to dangerous levels with benchmark Brent crude prices peaking at about $70 per barrel and West Texas Intermediate (WTI) rising to mid-$60s.

On Tuesday, global stock market meltdown and rising crude production led to the easing of oil prices as it closed at lowest levels in two weeks. Brent crude fell 42 basis points (bps) to $68.73 a barrel while (WTI) crude was down 54 bps to $64.15 per barrel at the New York Mercantile Exchange.

In the local commodity markets, crude oil futures fell Rs 19 to Rs 4,081 per barrel.

D K Srivastava, chief policy advisor, EY India, said high crude prices would be an important concern of the MPC as it reflected a cost-side risk to inflation.

"Since they look at different kinds of risks affecting inflation, this would an important risk and they would try and assess how this would not only affect inflation but also put pressure on fiscal deficit," he said.

Srivastava said high crude prices would be an important factor in holding of any rate cut; "In due course of time, (high crude prices) could even push the policy rate up".

"For the time being there would be a continued pause because even though all forces have become visible, they have not yet taken a shape which would warrant a change in the rate just yet. But in the forthcoming review, at any time, the RBI may consider a hike in the repo rate" said the EY economist.

Since India is a net importer of petrol and petroleum products, elevated crude prices are not only risk to inflation but also to its fiscal performance.

The Economic Survey-2017-18, which was recently released by the chief economic advisor (CEA) Arvind Subramanian, states, "Contribution of fuel and light group in CPI (consumer price index) inflation in 2017-18 (April- December) was thrice of that in 2016-17 (April- December).

"Additionally, average crude oil (Indian basket) prices have risen by around 14% so far in 2017-18 (mid-January 2018) vis-à-vis 2016-17. Going by the recent trends, the average crude oil prices could be in the vicinity of $ 56-57 per barrel in the current financial year and could rise further by another 10- 15% in 2018-19."

It estimates that every $10 per barrel rise in crude price shaves off 0.2%-0.3% of the GDP growth and current account deficit (CAD) by about 0.4 percentage point of GDP, and pushed up inflation by 0.2%-0.3%.

Richa Gupta, senior director and economist at Deloitte India, said if the current inflationary pressure, caused largely by rising crude, continued then the second half of the next fiscal could see a policy rate hike.

"If current crude prices sustain and go up from here then it would be matter of discomfort (for the MPC). There was some expectation that the crude prices would rebound, but how much further they would go (from here) is now important," she said.

The US-based Energy Information Administration (EIA) has predicted that the Brent crude price, which averaged $54 per barrel in 2017, will average at $60 per barrel in 2018 and at $61 per barrel in 2019.