Fallout from flaring of West Asia conflict and the challenge for policymakers
The reverberations from the ongoing conflict in West Asia are being felt in markets across the world. On Monday, Indian markets also exhibited weakness, ending the day down 0.7 per cent. Foreign portfolio investors pulled out close to Rs 1,000 crore. Crude oil prices rose around 4 per cent as fears of instability in the region gained traction . While Indian stock markets recovered on Tuesday, continuing conflict in the region is only likely to add-to the prevailing uncertainty in global markets already weighed down by tighter financial conditions.
Of particular concern is the implication for crude oil prices. In September, prices were hovering around $97 per barrel after Saudi Arabia and Russia had announced the extension of their production cuts. Prices had eased thereafter , falling to roughly $85 before the attack by Hamas. However, on Monday, Brent crude oil was trading at around $88 a barrel, while on Tuesday prices had edged marginally lower. There is a concern that an escalation in the conflict engulfing the region could push prices higher.
For an oil importing country like India which imports more than 80 per cent of its requirement, higher prices could impact the current account deficit and inflation , and possibly have fiscal implications as well. To-put the current prices in perspective , in its latest monetary policy report, the RBI had factored in crude prices at $85 per barrel for 2023-24.
Higher prices could push up inflation above the RBI’s estimate of 5.4 per cent for the full year, which is lower than the World Bank’s recent estimate of 5.9 per cent. However, it is also possible that retail prices may not see a complete pass through of higher crude oil prices — since May 2022, retail prices of petrol and diesel have remained unchanged — as the burden of higher prices could be borne by the oil marketing companies and the government.
Higher crude oil prices will also have implications for the current account deficit. As per some analysts, the deficit is expected to rise in the second quarter from 1.1 per cent of GDP in the first quarter. To what extent it rises further in the second half of the year will depend on how high prices go and for how long they remain elevated . Alongside , this conflict may also have implications for the recently announced India-Middle East-Europe Economic Corridor. During this period of acute global uncertainty, policymakers in India must be guided by the objective of preserving macroeconomic stability.