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Morgan Stanley estimates a sustained oil price of $110 a barrel could undermine India’s economic stability, likely forcing the central bank to resume hiking interest rates.
As the world’s third-biggest consumer of oil, India is one of the most exposed economies in Asia to rising crude prices. A $10 increase in oil prices boosts inflation by 50 basis points and contributes to a 30 basis-point widening in the current account balance, Morgan Stanley’s economists estimate.
Oil above $110 a barrel would be destabilizing for India’s economy, the investment bank said, resulting in higher domestic fuel prices and second-round inflationary effects. The current account deficit would also likely widen to beyond the comfort level of 2.5 per cent of gross domestic product, it said.
“With macro stability indicators stretched under this scenario, we think currency depreciation pressures could rise and lead the Reserve Bank of India to restart its rate hike cycle,” Morgan Stanley’s economists led by Chetan Ahya wrote in a note on Sunday.
The RBI has kept its policy rate unchanged four times now, but has struck a relatively hawkish tone while inflation remains above the 4 per cent midpoint of its target band. The central bank’s forecasts are based on a crude oil price of $85 a barrel in the second half of the current fiscal year, which ends in March 2024.
Morgan Stanley’s base case is for oil prices to be sustained at $95 a barrel, which would be more manageable for the economy, it said. Under this scenario, the RBI will likely delay cutting interest rates, it said.
India’s basket of crude oil prices averaged $87.09 a barrel as of Nov. 2, compared with an average of $90.08 a barrel for the full month of October. Global benchmark Brent crude traded above $85 a barrel on Monday.
