NEW DELHI: Global crude oil prices took a breather on Tuesday, Brent crude falling by over 5 per cent late evening following unconfirmed reports that Saudi Arabia would restore full production at its drone-hit facility sooner than expected.
As of 9.30 pm IST, Brent crude was trading at $65.73, down 4.77 per cent compared to Monday’s close of $69.02.
The hoped-for moderation in crude oil prices will come as good news for India, one of the world’s largest crude oil importers, with analysts having warned after Monday’s surge that sustained high prices of crude in a low demand environment was likely to lead to a ‘stagflationary’ situation.
“When the rise in oil prices is driven more by supply-side factors, as is the case currently, it tends to be more damaging to large net oil importers,” Nomura analysts noted, adding that this was because “in the absence of a strong pick up in exports, higher import cost of oil could sharply worsen current account positions, compress profit margins and, to the extent that firms pass on higher production costs, raise consumer price index (CPI)inflation”. Stagflation is a term used to describe a situation where inflation is persistently high, demand is stagnant and unemployment rates are high.
“Given weak demand, higher oil prices, even if temporary, can result in a stagflationary outcome,” Nomura said. According to the agency, every $10 per barrel rise in crude price would reduce gross domestic product (GDP) growth by about 0.2 percentage points, widening current account deficit by 0.4 per cent of GDP, widen fiscal deficit by 0.1 per cent of GDP and add around 0.30 per cent to retail inflation.
However, it is unlikely that even high crude oil prices would push up retail inflation high enough for the Reserve Bank of India (RBI) to put a hold on the expected interest rate cuts since the price rise effect is expected to be short term.
“Given this is a temporary supply-side shock, we expect the RBI to look through higher oil prices, especially since CPI inflation will be at its 4 per cent target and as the negative output gap would persist,” Nomura said.
The firm expects a cumulative 0.40 per cent rate cut in the last three months of 2019.