Warning: Oil prices could soar much beyond $120

Oil prices continued to stay around a 9-month high of $120 a barrel for the second day running on Tuesday.

For the Indian economy, which relies on oil imports to fuel its growth engine, rising oil prices might be a sign of further gloom.

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A report in the Hindustan Times said that oil marketing companies have held off raising prices for petrol, diesel and cooking gas until the end of the assembly elections in five states.

The article says that an informal diktat from the government has asked the companies to hold prices till the end of the polls despite global oil prices rising for the past two months.

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The threat of sanctions from the US for buyers of oil from Iran has already begun to boost prices. Reuters reports that China, Japan and Europe have already begun cutting their imports.

“With its current regime, Iran is always going to be considered a hostile nation by the West, so the long term solution maybe for countries to wean themselves off Iran’s oil supply where possible,” Ben Le Brun, a Sydney-based markets analyst at OptionsXpress told Reuters.

India imports nearly 80 percent of its crude oil requirements. It purchases around nine percent of its oil needs from Iran. Finding an alternate seller to avoid US sanctions may not necessarily help reduce prices.

Demand globally is also expected to remain robust with the US economy growing and no signs of slowing in the Chinese economy.

Indian oil companies are already facing deep losses, and with all signs pointing to the possibility of crude oil prices rising further, they will have no choice but to pass it on to the consumers at some point.

Businesses will also be hit by higher input costs, which are likely to be passed on to consumers, at least in some industries.

They will give a boost to inflation, which only recently cooled to 6.56 percent in January, and make Reserve Bank of India governor think twice about cutting interest rates aggressively.

In other words, we could be back to square one: low growth and persistently high interest rates.

And that’s definitely not good news.