The key issue is whether the decline global crude oil prices is because of lower demand or higher supply
The sharp rise in the global price of crude oil has been one of the key risks to Indian macro stability. Economists, policymakers and bond market traders have been worried that higher energy prices could send inflation further away from the target while the current account deficit would expand.
These are legitimate fears. The recent drop in crude oil prices—below $60 for a barrel of Brent this week—is thus a reason to let out a sigh of relief.
The key issue is whether the decline is because of lower demand or higher supply. And whether it is merely a pause in the recent rally.
Lower energy demand means global economic recovery is stalling. Higher supplies mean the challenge to the global oil cartel from US shale remains a potent force.
Many energy analysts believe the recent decline in crude oil prices is driven by new supply expected this year.
If they are right, India can get some welcome breathing space on the inflation and balance of payments fronts.