Plunge in Global Oil Prices Provides Economic Relief for India Amid Geopolitical Uncertainty

The recent decline in global oil prices, despite heightened geopolitical tensions in West Asia, is a significant boon for the Indian economy, which heavily relies on importing over 85% of its crude oil. Although the Indian crude oil basket’s prices saw an increase during July-October 2023 due to OPEC+ production cuts, the current global economic slowdown has led to a renewed fall in oil demand, subsequently causing prices to decrease.

The Indian basket’s crude oil prices averaged $90.08 per barrel in October 2023 and $93.54 per barrel in September 2023. International benchmark Brent crude prices have now dropped to $77 per barrel, indicating a potential further decrease in the Indian basket.

While geopolitical tensions can push oil prices higher, the softening demand remains a primary factor in driving prices down. Chief Economic Advisor V. Anantha Nageswaran believes that, despite geopolitical factors and events affecting cargo movement, slowing demand will play a crucial role in preventing a significant spike in oil prices in the next financial year (2024-25).

Nageswaran stated during an interaction at the State Bank of India’s Banking and Economic Conclave that energy demand is unlikely to be sufficient in 2024 to cause a surge in oil prices. He emphasized that if prices do rise, they may further dampen economic activity.

Economists estimate that a 10% surge in oil prices from the baseline of $85 per barrel could weaken domestic growth by 15 basis points and increase inflation by 30 basis points. Global investment bank Morgan Stanley suggests that every $10 increase in oil prices raises India’s inflation by 50 basis points, assuming the higher costs are passed on to consumers, and widens the current account deficit by 30 basis points.

The Reserve Bank of India (RBI) has been vigilant in combating inflationary pressures, hiking the policy repo rate by 250 basis points between May 2022 and February 2023. While the rate has remained steady at 6.50%, the RBI aims to lower inflation to the 4% target. The central bank projects inflation at 5.4% in fiscal year 2023-24, based on an average crude oil price of $85 in October-March. Any increase in crude oil prices may delay interest rate cuts to stimulate economic growth, while a decline in prices would likely prompt earlier rate reductions.