Falling oil prices may not ease inflation

Crude prices have fallen 24.41% in the last 12 months. However, retail prices of petrol and diesel have remained unchanged since May 2022.

According to economists, falling crude oil prices can, however, help the government on the fiscal and macroeconomic front, with the country being heavily dependent on imports to meet its energy needs.

India imports 85% of its energy required.

Prices of fertilizers, and gas, which too India imports heavily, are also linked to the global crude prices.

The pressure on oil prices is going to be subdued in the medium term due to recessionary trends and slowing down of economies globally, said N.R. Bhanumurthy, Vice-Chancellor of Dr. B.R. Ambedkar School of Economics University, Bengaluru.

However, this is unlikely to be passed on to retail customers, Bhanumurthy said.

“Any changes in inflation in the next three to four quarters will largely be due to domestic factors," he said.

“We had almost 30% premium compared to the global oil prices (with purchasing of Russian oil). Even now, there’s $5-6 per-barrel difference. That is the reason the pressure of imports on inflation in India is less than in many other countries," he added.

During the last budget, crude oil was factored in at about $84-85/barrel for budget estimates, after the Indian basket averaged about $93 a barrel in FY23.

At present, crude prices are hovering around $78-79 mark and are expected to remain at $75-80 a barrel in the current fiscal.

Meanwhile, the rupee has risen 3.39% in the last 12 months. ($1= ₹82.2975).

Experts said that had the crude oil prices been passed on to customers, inflation would have been much higher when oil prices were rising and the rupee falling a falling.

It would be lower currently, as crude oil prices are falling and the rupee has stabilized.

“Consumers were earlier insulated from high crude oil prices, at a time when the rupee was also depreciating. OMCs (Oil Marketing Companies) were absorbing the shock and incurred losses. So, once the recovery is over, they may look to pass gains to the customers," said D.K. Pant, chief economist at India Ratings.

“If there is no major upheaval in the global economy, I expect oil prices to remain between $75-80 a barrel (in the coming months).

If this happen, the major benefit will happen not much on the oil subsidy, but on the fertilizer subsidy," Pant added.

India’s consumer price index inflation eased sharply to 4.25% in May, registering a 25-month low, and remaining under the Reserve Bank of India’s upper tolerance limit of 6% for the third straight month.