More Stories

Informist, Wednesday, Sep 25, 2024

 

NEW DELHI – A sharp fall in global crude oil prices in the last few weeks has eased price pressures for India and has the potential to bring down domestic inflation and aid in the Reserve Bank of India's search for comfort to ease monetary policy, economists said.

 

According to data from the Petroleum Planning & Analysis Cell, the price of India's crude oil basket so far in September is $73.86 per barrel, down 6% from August and 21% from September 2023. This has been due to global crude oil prices cratering on concerns about weak demand from China and increase in production by Saudi Arabia and Libya. On Wednesday, the December WTI crude oil future closed at $69.13 per barrel on the New York Mercantile Exchange, while Brent crude settled at $72.90 per barrel.

 

"...from the point of view of CPI inflation, stable prices or a downward movement are the two possibilities depending on government action," Madan Sabnavis, Bank of Baroda's chief economist, said in a note earlier this month.

 

While the finance ministry is not keen to cut the excise duty on fuel, Informist reported last week quoting a senior official that the government is in talks with oil marketing companies over the possibility of lowering pump prices. On Sep 17, the government cut the windfall gains tax on domestically produced crude oil down to zero.

 

Retailers had cut fuel prices in March by 2 rupees per litre after a gap of nearly two years. According to Girishkumar Kadam, senior vice-president and group head of corporate ratings at ICRA, oil marketing companies have the space to lower fuel prices by 2-3 rupees per litre if crude oil prices remain stable.

 

INFLATION RELIEF

Although an interest rate cut is not widely expected from the RBI's Monetary Policy Committee at its meeting next month, a key monitorable will be the central bank's inflation forecast and their underlying assumptions. Since April, when the RBI said its forecast assumed a crude oil basket price of $85 per barrel for 2024-25, the price of the basket has fallen by 17%.

 

The RBI's crude oil assumption may not have undergone a huge change between April and August, given that the central bank's inflation forecast for the financial year 2024-25 (Apr-Mar) stayed constant at 4.5%, with even the quarterly forecasts--except for Jul-Sep--only moving by 10-20 basis points. According to the RBI's April Monetary Policy Report, if crude oil prices fall by 10% relative to the baseline and the decline is passed through fully to pump prices, inflation can cool by roughly 30 bps.

 

CPI inflation in Jul-Aug has been 80 bps below the RBI's forecast of 4.4% for the full quarter. And while it may undershoot the projection by nearly half a percentage point, it is seen rising to 4.7% in Oct-Dec.

 

A two-rupee cut in petrol and diesel prices could directly reduce inflation by around 20 bps, according to QuantEco Research. Meanwhile, Rahul Bajoria, head of India and ASEAN economic research at Bank of America Securities India, said a 5-rupee-per-litre cut in pump prices would help lower CPI inflation by around 30 bps over 2-4 months.

 

"While this is not a very large decline in headline inflation, it could generate an outsized impact on inflation expectations, which are influenced more by essential food and energy prices," Bajoria said in a note on Sep 24.  End

 

US$1 = 83.70 rupees

 

Reported by Siddharth Upasani

Edited by Rajeev Pai

 

For users of real-time market data terminals, Informist news is available exclusively on the NSE Cogencis WorkStation.

 

Cogencis news is now Informist news. This follows the acquisition of Cogencis Information Services Ltd by NSE Data & Analytics Ltd, a 100% subsidiary of the National Stock Exchange of India Ltd. As a part of the transaction, the news department of Cogencis has been sold to Informist Media Pvt Ltd.

 

Informist Media Tel +91 (11) 4220-1000

Send comments to feedback@informistmedia.com

 

© Informist Media Pvt. Ltd. 2024. All rights reserved.