High crude oil prices: How will it impact India and you?

Disruption in supplies from Iran continue to nudge crude prices higher, and signs of the global economy stabilising means that oil prices could stay firm or even climb further. Crude oil prices have already risen around 15% so far this calendar, with the benchmark Brent ruling around USD 124.54 per barrel.

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Yesterday, International Monetary Fund (IMF) chief Christine Lagarde cautioned that supply disruptions from Iran could push global crude prices by up to 30% from these levels.

There are concerns that high crude prices may derail global economic recovery. "The sudden and brutal rise in the price would have serious consequences on the global economy at large and will impact particularly the oil importing countries and amongst them low income countries," Lagarde warned.

India will be among the countries that feel the pinch of rising oil prices, given its high dependence on imports. For this financial year till April, India's oil import bill has risen 41% to over USD 132 billion, and accounts for nearly one-third of all imports.

"If there was oil shock of significant multitude, it will affect all of us, all the importing countries of the world. Clearly India is one, but not the only one," Lagarde says.

From India's perspective, rising crude oil prices has implication on the trade deficit, and thereby the currency, and also on inflation.

India's trade deficit has widened to USD 166.8 billion till February, and in the absence of consistent foreign capital flows, the rupee has been under pressure.

After hitting a record high of 54.30 to the dollar in December last year, the rupee is currently trading around 50.50.

The Reserve Bank of India is dithering from cutting interest rates because it is worried that inflation would worsen further in the coming months if crude prices continue to rise.

"There continues to be significant suppressed inflation in fuel, fertiliser and power as administered prices do not fully reflect the costs of production," the central bank said at the credit policy meet last week.

To deal will high prices, the government will either raise subsidy burden or will be forced to hike fuel prices. With the government having committed to restrict subsidy spend to less than 2% of the GDP in FY13, it has no choice but to hike fuel prices. Finance Minister Pranab Mukherjee has indicated a fuel price shortly, saying 'political consensus for it would be built after the Budget session'.