Rising Crude Oil Prices May Prompt RBI To Hike Interest Rate Again, Says Morgan Stanley

A $10 rise in oil prices could trigger inflation by 50 basis points and contribute to a 30 basis-point widening in the current account balance, says Morgan Stanley

The RBI’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.

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The Reserve Bank of India (RBI) may resume interest rate hiking as crude oil prices reach $110 a barrel, said Morgan Stanley. According to news agency Bloomberg, surging crude prices may India’s economic stability. India, as the world’s third-biggest consumer of oil, is one of the most exposed economies in Asia to rising crude prices.

According to Morgan Stanley’s economists, a $10 rise in oil prices triggers inflation by 50 basis points and contributes to a 30 basis-point widening in the current account balance. The investment bank in its report said that sustained oil prices above $110 a barrel would destabilise India’s economy, resulting in higher domestic fuel prices and second-round inflationary impacts can be seen.

The current account deficit may also likely widen to beyond the comfort level of 2.5 per cent of gross domestic product, Morgan Stanley 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.

The central bank 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 RBI’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 November 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.