Crude Above $100 as Reserve Bank of India Shifts to Calibrated Tightening

The Monetary Policy Committee (MPC) of the Reserve Bank of India has shifted its stance to “calibrated tightening” as crude oil prices had crossed the $100 per barrel mark. Higher cost of fuel and transport will get translated into higher price in the price basket. Import of expensive energy will also lead to depreciation of rupee, affect disposable income of consumers and also affect prices and margin of companies dependent on energy.

Key Takeaways:

• Brent crude stayed above $100 a barrel for nearly three-and-a-half years from January 2011 to August 2014. Meanwhile, the Sensex plunged 24.6% in 2011 but rose in the subsequent three years.
• Average Brent price for March was $117.25/bbl and average for June was $122.71/bbl. The Sensex ended the year higher by 4.4% on oil shock of 2022.
• The growth rate of real gross domestic product for India fell to 6.7% in financial year 2009 from 9.3% in financial year 2008 during the 2008 episode.
• The duration of crude prices above $100 remains the outstanding question in assessing pressure on inflation, the rupee and company earnings.

Reserve Bank of India stance and oil pressure on India’s inflation, rupee and earnings

The Reserve Bank of India changed its stance as the crude oil price surge was linked to inflationary pressure. Higher fuel and transport costs feed into the broader price basket, and an inflationary oil shock restricts the central bank’s room to ease policy.

More expensive crude imports enlarge India’s oil bill and put pressure on the rupee. The transmission also reaches households and companies, with consumers having less disposable income and energy-intensive businesses facing margin pressure.

The duration of crude prices above $100 remains unresolved. The historical record links that question to the extent of pressure on the rupee and inflation, and to whether companies can absorb higher energy costs.

2022 oil spike kept the Sensex higher for the year

Brent averaged $117.25 a barrel in March 2022, $104.58 in April, $113.34 in May and $122.71 in June. The Sensex ended 2022 higher by 4.4%.

India’s real gross domestic product growth was 7.6% in financial year 2023 under the latest gross domestic product series released by the Ministry of Statistics and Programme Implementation.

Brent stayed above $100 through the 2011-14 period

Brent was trading above $100 a barrel for nearly three-and-a-half years between January 2011 and August 2014. The Brent spot price averaged $114.64 in March 2011 and $123.26 in April 2011.

Brent oil averaged $125.45 a barrel in March 2012. Real GDP growth in India averaged 6.2% in FY’2012 and 5.1% in FY’2013, before increasing to 6.9% in FY’2014 under the 2011-12 GDP series.

The Sensex fell 24.6% in 2011, then rose 25.7% in 2012, 9.0% in 2013 and 29.9% in 2014. The period also included falling inflation, policy stabilisation and improving domestic macroeconomic conditions.

2008 oil shock coincided with a wider financial crisis

Brent averaged $92.18 a barrel in January 2008, when the Sensex peaked at 21,206 on January 10. It then averaged $103.64 in March, $122.80 in May and $132.32 in June before reaching about $145 during the summer.

The Sensex fell 52.5% in calendar 2008. India’s real gross domestic product growth slowed to 6.7% in financial year 2009 from 9.3% in financial year 2008 under the gross domestic product series used at that time. The oil shock added to inflation, current-account and growth pressures during the wider global financial crisis.