Economic relief from the Ukrainian crisis would only be a matter of degree. A realistic look at the crude oil market amid Cold War II tensions would suggest that the latest global price spike isn’t going to stop anytime soon. Indeed, it could take longer than we can afford to wait before taking action. The mere hint of a possible US-led restriction on Russia’s vast exports saw oil surge on Monday to levels not seen since the shock of mid-2008, before the EU backed down and the the US caveat does not sink in that only relief supplies could allow such drastic levels. punishments. Yet even an unlikely mix of diplomacy and supply surges might not prevent global production from lagging demand, an expected shortage that had put oil on an uptrend for weeks earlier. Meanwhile, Moscow could impose its own cut, as it has threatened to gas Europe, in fierce retaliation for its isolation by the West. Either way, with Russian crude suddenly deemed too hot to handle, its overseas availability has plummeted. If oil futures see bets of $200 a barrel, about $60 higher than Monday’s peak, blame it on a loaded probability matrix against an easy outcome. In other words, an oil shock is upon us, prices may stay above $100 for months, and we need to minimize the attendant risks to the Indian economy.
With net imports estimated at around 1.5 billion barrels in 2022-23, India faces a hugely inflated oil bill. As our Union budget for next year had assumed much cheaper energy, its calculations would have to be redone. For now, higher retail fuel prices are unavoidable, but we also need to mitigate inflationary pressures, so price revisions should be modest. The government should cut fuel taxes and absorb much of the hit. Taxes had been increased after the fall in the price of oil in 2014, but this source of income has had its day. The widened fiscal gap will have to be bridged by other means, or simply supported to stem the knock-on effects of high fuel prices on other retail prices. A weaker rupee is also a burden. As the oil shock drives up domestic demand for dollars to pay bloated import bills, while foreign investors liquidate local assets for US greenbacks, our currency has fallen to nearly ₹77 per dollar. A widening trade gap in the energy sector could further weigh it down. Lest steeper declines lead to greater outflows of speculative money, exchange rate volatility must be contained by our central bank by using its dollar reserves to buy rupees, as it has done. As a short-term policy, it would make sense at this point to support the rupiah until some stability is achieved, before allowing it to float freely again. Buying cash naturally reduces local liquidity, which can put upward pressure on the cost of credit across the economy. But then, it is favorable because it also makes it possible to ward off price instability.
On monetary policy, the additional cost burdens are expected to dampen economic growth in a way that cheap lending may not be able to stop anyway, given weak private demand in the economy. overall and the visibly weak effectiveness of covid supply-side measures like easy money, while retail inflation could conceivably be kept capped at 6% if credit starts to tighten. In its April monetary policy review, our central bank is expected to toughen its stance and tackle inflation, which will be difficult to stem from the rise thereafter. This risk outweighs the uncertain gains of a negative real interest rate, which is unsustainable for an extended period anyway. In today’s uncertainty, safety should be our priority.
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