Moneycontrol Pro Panorama | Rising oil prices will be a headache for the MPC

According to industry veterans, if oil price continues to rise, it may impact the marketing margins of oil marketing companies.

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Crude oil is sizzling in international markets. From the lows of $72-73 per barrel in early 2023, Brent crude oil price touched $89.6 in April, scaling this level for the second time in 12 months.

The reasons are many, from concerns of disruption in crude supplies due to geopolitical risks in the Middle-East and the Russia-Ukraine region, the protracted Red Sea crisis and low US inventory, to elevated global demand on the back of strong US jobs and factory orders data, signs of China’s growth limping back and an overall expansion in the global economy that indicates improved energy demand.

Even if oil prices stay sticky at current levels, other things being constant, these reasons would surely cap downsides. The near $20 dollar per barrel (in a year) rise in international crude oil prices in a year is bound to have cost implications for most countries, albeit in varying degrees.

Surging oil prices are a negative for India. It signals energy-led inflation, given that it imports about 85 per cent of its crude oil requirement. In other words, it impacts almost all sectors of the economy. This is more pertinent against the backdrop of a robust domestic economy that, according to analysts, is far larger than it was in 2008 or 2013-14.

The March Purchasing Managers’ Index data (released today) for India shows that growth is not only strong, but momentum is increasing, while price pressures in services are rising. It shows growth accelerating. In fact, the survey says private sector output growth is nearly the second-fastest in nearly 14 years.

In this context, the bigger conundrum of elevated oil prices is: Who will pay for it? Note that there was a cut of Rs 2 per litre in retail fuel prices by Indian refiners. According to industry veterans, if oil price continues to rise, it may impact the marketing margins of oil marketing companies, unless they pass it on to consumers.

Also, companies face the heat of rising oil prices by way of energy, freight and transport costs, in addition to some other input cost pressures. Passing on rising input costs implies customers bear the brunt; absorbing cost pressures implies that corporate profitability would be squeezed.

Most certainly, these factors would be critical to the Reserve Bank of India’s decision on rates, to be announced tomorrow. Besides, the risks to food inflation have not ebbed with the coming monsoon being a key determinant of agricultural output and food prices. A report by Emkay Global Financial states that the upcoming policy may not see material changes in the macro assessment by the RBI. However, any indications of timing of policy pivot or a stance change or move to manage liquidity will be key to financial market movements.
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Vatsala Kamat
Moneycontrol Pro