LONG-TERM CHALLENGES FROM GULF CRISIS REMAIN

THERE has been a dramatic shift in the global risk environment. The West Asia crisis has reportedly reached a resolution, which created room for a sharp drop in oil prices — the biggest challenger to the economic well-being of net oil importers like India.

- INDRANIL PAN

Higher oil prices have large ramifications for India: fiscal position is stretched as higher fertilizer and LPG prices need to be absorbed by the government to protect the consumer from the impact, current account balance swells and can lead to currency depreciation, the risk of inflation rises due to currency depreciation and the pass-through from manufacturers to the end users. Finally, there is a risk for monetary policy to tighten, and this can lead to a relatively large economic growth sacrifice when uncertainty remains high.

In the June policy, the RBI had, after considering a higher price of oil for its forecasting models, slashed the GDP growth forecast for FY27 to 6.6% from 6.9% earlier. On the other hand, the inflation forecast was raised from 4.6% to 5.1%, therefore also raising the odds for a rate hike by the RBI. That was on the June 8, when Brent crude price was at $95/bbl, but now it has dropped to $72/bbl. Inflation has already shown some evidence of undershooting RBI’s own expectations for Q1FY27. Though risks of a poor monsoon due to El Nino remain, food stocks at the FCI remain robust to tackle inflation pressures that could arise due to food shortages.