Battered oil augurs well for consumer inflation, interest rate cut

Oil prices tested a three-year low on Friday due to heightened fear of deeper impact of the corona virus outbreak crushing global economic growth and energy demand.

Global benchmark Brent slipped below the $50 per barrel-mark briefly, marking a decline of over 4 per cent and a level last seen in July 2017, before recouping to close 2.4 per cent down from the previous close.

Global oil prices have been declining since the outbreak due to falling demand, largely from China as it went into a lockdown mode to contain the outbreak. Since India meets 83 per cent of its oil needs through imports, lower prices augur well for the government and consumers.

A low oil price regime reduces fuel costs for the aam admi and industry, which helps the latter in times of economic slowdown. It also improves macro-economic parameters – lower inflation and subsidy bill, keeps the rupee healthy as there is lesser need to buy dollars to pay for crude. This in turn improves the balance of payments position.

There are other benefits. Lower inflation creates ground for interest rate cut, which eases burden on households by reducing home or consumer loan installments. Reduced subsidy burden and improved current account deficit means more legroom for the government to spend on social schemes or announce incentives to revive growth.

India’s crude purchase has so far averaged $64 per barrel in 2019-20 and is likely to close the fiscal around this level. This is comforting since the government math is based on a $65-per-barrel oil price.

ET Energy World
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