Oil Price Dynamics and India's Economic Outlook

India's monetary authorities are considering the potential for reintroducing interest rate hikes if Brent crude oil maintains a level consistently above $110 per barrel. In this scenario, there is concern about the possibility of an expanded current account deficit in India and its potential adverse impact on the Indian rupee.

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Inflation and Current Account Impact

If oil prices remain elevated over an extended period, there is a growing concern that India's current account deficit could surpass the critical threshold of 2.5% of GDP.

With every $10 increase in oil prices, assuming the resulting higher costs are passed on to consumers, India's inflation could potentially rise by 50 basis points, while the current account deficit may widen by 30 basis points.

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Recent Monetary Policy Actions

To address inflationary challenges in the economy, India's interest rate-setting committee implemented a series of rate increases totaling 250 basis points between May 2022 and February 2023. Since then, the committee has maintained a steady policy repo rate of 6.50%, with a continued emphasis on achieving the 4% inflation target.

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Inflation Projections and Geopolitical Risk

Projections indicate that inflation is expected to remain around 5.4% for the fiscal year 2023-24, considering an average crude oil price of $85 during the October-March period.

India's significant exposure to higher oil prices is evident in its oil trade balance, which stands at -2.6% of GDP. Meanwhile, the ongoing conflict between two groups in the Middle East poses a substantial geopolitical risk to oil markets.

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Future Oil Price Expectations

the possibility of oil prices reaching $95 per barrel in the October-December period, with an anticipated decline in 2024. Nevertheless, maintaining oil prices at this level could impact India's macroeconomic stability, potentially leading to increased inflation and a potential delay in the planned rate cut cycle.