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Published: October 5, 2023
Updated: October 5, 2023

Crude Oil's Influence on RBI's Monetary Policy Decision

Global Factors Weigh on RBI's Upcoming Policy Decision

As we await the Reserve Bank of India (RBI) Governor Shaktikanta Das's announcement of the monetary policy decision on October 6, there is growing speculation about how high crude oil prices might sway the outcome. Analysts in the financial markets largely anticipate the central bank to maintain the status quo, keeping interest rates unchanged due to a more favourable inflation outlook. However, international variables, including surging crude oil prices and rising US bond yields, are casting new shadows on the Indian economy.

Crude Oil Price Surge and Its Implications

Crude oil prices recently reached a 10-month high, prompted by actions taken by Saudi Arabia and Russia, members of the Organization of Petroleum Exporting Countries and its allies (OPEC+). They decided to extend voluntary production cuts of 1.3 million barrels per day until the end of the year, raising concerns about oil supply. OPEC nations now produce approximately 30 percent of the world's crude oil, with Saudi Arabia being the largest producer within the cartel. OPEC+'s decisions hold considerable sway over global oil prices.

Impact on Inflation and Interest Rates

These output cuts by major oil-producing countries have added inflationary pressures to the global economy. Central banks worldwide are already poised to raise interest rates before the year's end. Last week, Brent crude approached the $98 per barrel mark, fueled by US government data revealing a 2.2 million-barrel decline in US crude stocks to 416.3 million barrels.

Crude Oil's Effect on India

India, a net importer of crude oil, relies on imports for up to 85 percent of its energy needs. As global oil prices climb, India may face a heavier import bill throughout the year. Sudden changes in oil prices can also influence price and wage-setting in the economy, altering inflation expectations for businesses and households. However, this impact is typically short- lived and reverts to the mean swiftly, according to the RBI.

Economic Ramifications

Higher crude oil prices can increase production and transportation costs for various sectors, impacting their profitability and competitiveness. This, in turn, may reduce consumers' disposable income, affecting their demand for goods and services.

MPC's Likely Stance

Analysts believe that the RBI's Monetary Policy Committee (MPC) may not be swayed by the recent uptick in global crude oil prices, given India's robust macroeconomic indicators. Although Brent crude surged to $96, it has since corrected to $85 per barrel. The production cuts by OPEC and Russia are expected to keep crude prices elevated. The MPC is expected to maintain its stance, focusing on inflation amid sustained economic growth.

While global factors like rising crude oil prices are noteworthy, the RBI's primary concern appears to be managing inflation and supporting economic stability. The upcoming policy announcement will be closely watched to see how the central bank balances these competing interests.