RBI Monetary Policy: Will high crude oil prices impact MPC’s decision on October 6?

Reserve Bank of India (RBI) Governor Shaktikanta Das will unveil its monetary policy decision tomorrow (October 6) after a two-day review that began on October 4. Analysts on D-Street widely expect the central bank to keep rates unchanged on India’s easing inflation print and maintain its hawkish policy stance on Friday. However, global headwinds such as high crude oil prices and surging US bond yields have posed new threats to the economy.

International crude oil prices surged to 10-month highs after Saudi Arabia and Russia – part of the Organisation of Petroleum Exporting Countries and its allies (OPEC+), extended voluntary production cuts of 1.3 million barrels per day to the end of the year, raising supply concerns in oil markets.

Also Read: RBI Monetary Policy: Rate-pause may continue on CPI inflation, GDP print: Key indicators to watch

Today, OPEC nations produce around 30 per cent of the world’s crude oil. Saudi Arabia is the largest oil producer within the cartel, producing more than 10 million barrels a day. OPEC+ pumps around 40 per cent of the world’s crude and its policy decisions can have a major impact on oil prices.

The output cuts by the kingdom and Russia have posed fresh inflationary pressures for the global economy with central banks already on course to raise interest rates before December. Last week, Brent surged to almost $98/barrel-mark after US government data showed that US crude stocks fell by 2.2 million barrels last week to 416.3 million barrels.

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How high oil prices impact the Indian economy?

India’s economy grew at its quickest pace in a year in the April-June quarter, expanding 7.8 per cent on year, buoyed by strong services activity and robust demand, but a five-year low monsoon rainfall could restrain future growth, according to economists. The Q1FY24 economic growth was the highest in four quarters.

However, the economic impact of global oil supply have important implications for India – a net importer of crude oil – to deliver price stability. India fulfills as much as 85 per cent of its energy needs through imports, may see a heavier import bill if international crude oil prices keep rising throughout the year.

Surprise changes in oil prices can also influence the price and wage-setting in the economy by altering the inflation expectations of firms and households, and so, domestic economic activity falls on impact of such a shock. However, the impact is felt only for a short duration as it reverts to mean quickly, according to the RBI.

Higher crude oil prices will increase the cost of production and transportation for various sectors, affecting their profitability and competitiveness. This will reduce the disposable income of consumers, affecting their demand for goods and services.

Also Read: From high inflation to import bill – the domino effect of rising crude oil prices on Indian economy

Will crude oil price changes impact RBI MPC’s decision?

Analysts reckon that the RBI’s rate-setting panel may not be influenced by the recent rise in international crude oil prices, over India’s strong macroeconomic indicators. After spiking to $96 Brent crude has now sharply corrected to $85 per barrel. Brent crude oil futures last fell 68 cents, or 0.8 per cent, to $85.19 a barrel and US West Texas Intermediate crude futures were 67 cents, or 0.8 per cent, lower at $83.55, according to news agency Reuters.

Production cuts by OPEC and Russia will keep crude prices elevated. Apart from supply, demand will influence the price and, therefore, global growth has to be carefully watched, according to analysts.

‘’If Chinese growth continues to struggle impacting global growth, oil demand will be soft restraining prices. MPC is unlikely to be influenced by the rise in crude price. MPC will hold the rates and maintain the stance in the meeting this week,” said Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

While analysts do not expect the central bank to change its stance from ‘withdrawal of accommodation’, however, the recent uptick in global crude oil prices and sustained economic growth are likely to keep the MPC’s focus on inflation.