New York: Oil prices climbed on Monday to the highest level in more than a month on signs of economic growth in the US and Asia. Over the past two years, much of India’s inflationary pressure has come from the rising cost of food, but higher global oil prices are creating new challenges, as India – which depends on imports for about 70 percent of its total fuel – tries to keep its petroleum subsidy burden in check.
Rising oil prices will make the Reserve Bank of India’s fight against inflation more difficult and will play a key role in monetary policy formulation. It will be uppermost in the minds of RBI mandarins as they meet later today for the mid-year policy review.
Benchmark crude rose $3.87, or 4.4 percent, to finish at $91.27 per barrel on Monday on the New York Mercantile Exchange. Prices haven’t been above $91 per barrel since August. Crude futures were also buoyed by optimism on global financial markets over the eurozone’s sovereign debt crisis. Oil crossed $88 a barrel in Asia amid signs of resilience in the economies of Japan and China.
Oil analysts expect consolidation and prices to head higher in the oil market ahead of the next meeting of the European leaders on Wednesday.
“Oil is moving tick-for-tick with global equity markets, which in turn, are gyrating with the latest headline handicapping the euro bailout fund,” energy trader and consultant The Schork Group said in a report.
Oil is India’s biggest import item and domestic oil refiners are the largest purchasers of dollars in the local currency market. The rupee, alarmingly, lost 10 percent of its value against the dollar this year. Inflation remains well above RBI’s March 2012 projection of 7 percent and a steep decline in the rupee makes RBI’s fight against inflation very difficult.
The depreciation of the rupee emerges as a new source of inflationary pressure, the RBI noted on Monday in its quarterly report on macroeconomic and monetary developments.
So what will the RBI do on Tuesday? As always, it will have to sift through conflicting data and economic opinions. Going by the stickiness of the inflation data, there is little likelihood of RBI ‘pausing’ its anti-inflation drive. The market is braced on Tuesday for RBI Governor Duvvuri Subbarao to announce a 13th rate rise since mid-March 2010. The RBI has said it was “inevitable” that some growth would be sacrificed in a high inflation environment.
The Reserve Bank of India raised rates 12 times in 18 months, but the monetary policy tightening has had no discernable impact on inflationary pressures. India’s economy grew 7.7 percent in the June quarter, its most anaemic pace in six quarters, but inflation came in at 9.7 percent in September.
For Indian citizens, the hope that food prices will come down has proved illusory. Inflation expectations have also hardened because of increased fuel prices. Since February 2010, the price of petrol, which India consider a “rich man’s fuel”, has risen 41 percent.
Despite the petrol price hikes, state-owned oil companies complain that they are still losing Rs 5 on every litre sold, and as much as double that on every litre of diesel. The recent hike in the retail prices of petrol, cooking gas and kerosene notwithstanding, the fear is that pump prices can only go up.