War and Uncertainty to Hit Global Economic Growth and Oil Prices

Global Oil Market Volatility and Its Impact on Indian Economy

Key Developments

• Brent crude oil prices have surged to $86.50 on average in March, up from $70 in February, and reached $100.46 on 12th March, reflecting the pessimistic expectation of a prolonged conflict with Iran.
• Several oil tankers have been struck, and insurance rates have skyrocketed, making shipping unviable, which could lead to further price increases.
• Brent crude oil price is assumed to be $100 over the next few weeks, considering the ongoing conflict and its impact on oil supplies.

Economic Forecast

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• The RBI's Monetary Policy Committee (MPC) is scheduled to meet in early April, and the latest inflation data for January was 2.7%, close to the bottom of the target range of 2% to 6%.
• The inflation data for February, released on 12th March, showed a modest increase to 3.2%, but still below the 4% target.
• The impact of the March surge in crude oil prices on headline CPI inflation in March is unlikely to push it above 6%, the top of the target range.

Inflation Impact

• A 10% rise in crude prices raises the CPI by about 0.2 percentage points on a contemporaneous basis, and a rise from $70 to $100 a barrel would raise inflation by about 0.8 percentage points, bringing it to 4.0%.
• The price rise could have a higher impact over a longer period as it works its way through the supply chain, and panic buying and hoarding could push up consumer prices, specifically for LPG and petrol.

Currency Impact

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• The Indian rupee has been steadily slipping, falling by over a rupee between end December to end February, and further to 92.22 per US$ as of 11th March.
• The RBI is likely to sell forex to prevent a sharp drop in the rupee.

Growth Impact

• Growth is likely to fall sharply due to the negative impact on the supply chain and prices of the crude oil supply shock, as well as a huge demand contraction in various sectors.