What is the issue?
- There is a sudden and sharp fall in the global price of crude oil.
- Despite the timely benefits, the inherent economic and monetary risks demand well thought out measures from the Indian policy makers.
How does it benefit India?
- The price of the Indian basket of crude oil has averaged around $74 a barrel so far this financial year.
- But there is some hope that it will stay in the $55-60 range for some time.
- A reduction in the price of oil is always a benefit for India, which imports over 80% of its crude oil.
- So the full-year import bill may be considerably lower than the revised estimate of $125 billion.
- This could create favourable cost conditions for the economy.
- It could also hopefully stimulate the RBI into cutting interest rates and giving investment and growth a boost.
What is the concern?
- With fall in global oil price, it is possible that, once again, foreign portfolio investors (FPIs) will put money into the Indian economy.
- Notably, in November, net inflows turned positive after almost $400 billion outflows in the previous month.
- This is perhaps good news for the stock markets but from the point of view of the larger economy, it is a mixed blessing at this point.
- The fear is that the effect of higher inflows would be renewed rupee volatility.
- As, a surge in FPI flows would have a disproportionate effect on the rupee-dollar exchange rate.
- This could possibly hurt the incipient revival in Indian exports (as a weaker domestic currency (depreciation) stimulates exports and vice versa).
- Notably, exports, till recently had been flat for years even amid a revival of global growth.
What is to be done?
- RBI - The RBI has to be on guard against the above possibility as this is a good moment for it to build up its reserves.
- If the rupee is too over-valued for Indian exports to experience sustained growth, then its value must eventually fall, in spite of a transitory spike in FPI inflows.
- So the RBI should logically use its ability to build dollar reserves to manage the rupee’s long-term fall.
- Centre - The government should also consider what the impact of the fall is on its own fiscal conditions.
- If it is having trouble meeting its fiscal deficit targets, it may be able to reverse its recent reductions in fuel taxes.
- However, given all these, any assumption that oil has found a permanent, lower level is not warranted.
- This price fall, which may last into the medium term, is due to a fortuitous combination of circumstances. Click here to know more.
- Such geopolitical considerations cannot be counted on to continue forever.
- So freeing the Indian economy from its long-term dependence on global price needs fresh attention.
Source: Business Standard
