While oil prices have surged nearly 40 per cent since December 1, 2021, when it was trading at $69.5, the benchmark Sensex at the BSE fell by over 1,250 points in the early trading hours on Tuesday and hit a day’s low of 56,394. The rupee also fell 33 paisa or 0.44 per cent to hit 74.84 to USD.

Between January and February, FPIs have pulled out a net of Rs 51,703 crore from Indian equities.

Why has crude jumped?

The spike has been driven primarily by fears of supply side disruptions as the threat of Russian invasion in Ukraine looms large following Putin’s deployment of troops to separatist areas Donetsk and Luhansk. A Russian invasion of Ukraine could not only disrupt crude supplies globally, but also lead to sanctions by the US and Europe. Oil prices have been rising over the last couple of months on concerns over supply, following tensions between Russia, the world’s second-largest oil producer, and Ukraine.

There is also concern over the growing imbalance between demand and supply following the opening up and normalisation of the global economy after the Omicron wave subsided.

The price of dated Brent, or the price of physical North Sea crude oil cargoes, set to be delivered on specific dates, have already crossed $100 per barrel. The dated Brent benchmark established by S&P Global Platts hit $100.8 per barrel on February 16, its highest levels since September 2014.

How will it impact the Indian economy?

The rise in crude prices poses inflationary, fiscal, and external sector risks. Crude oil-related products have a direct share of over 9 per cent in the WPI basket and, according to a report by Bank of Baroda chief economist Madan Sabnavis, a 10 per cent increase in crude would lead to an increase of around 0.9 per cent in WPI inflation.

“Our baseline forecast for WPI is 11.5-12 per cent for FY22 and 6 per cent in FY23, which might increase by around ~0.9-1 per cent because of increase in crude prices,” says the report.

India imports more than 80 per cent of its oil requirement, but the share of oil imports in its total imports is around 25 per cent. Rising oil prices will impact the current account deficit — the difference between the values of goods and services imported and exported.

“In FY22, the share of oil imports in India’s total imports has increased to 25.8 per cent (Apr-Dec ’21) as oil prices inched up. With oil prices on an uptrend again, the oil import bill is likely to swell further. This will have an impact on India’s external position. We estimate that a 10 per cent hike in oil prices will lead to an increase of India’s CAD by $15 billion or 0.4 per cent of GDP. This will have a negative impact on INR,” Sabnavis said in his report.

The rise in crude oil prices is also expected to increase the subsidy on LPG and kerosene, pushing up the subsidy bill.

A tank drives along a street in Donetsk, Ukraine, February 22, 2022. Putin has ordered the deployment of Russian troops to two breakaway regions in eastern Ukraine following the recognition of their independence. (Reuters Photo: Alexander Ermochenko)

How do high oil prices impact consumers?

High crude oil prices contributed to the increase in petrol and diesel prices that hit record highs across the country in 2021. Pump prices fell in November as the central government cut excise on petrol and diesel by Rs 5 and Rs 10 per litre, respectively, and most states followed by cutting Value Added Tax.

Petrol and diesel are currently retailing at Rs 95.3 and Rs 86.7 per litre, respectively in the national capital.

Since the tax cuts in November, oil marketing companies have not revised prices, even as Brent crude fell from about $84.7 per barrel at the beginning of November to under $70 at the beginning of December. Higher crude prices could now result in higher fuel prices for consumers, even though they did not get the full benefit of the fall in crude prices in November and December.

What can be the impact on investor sentiment and markets?

Investor sentiment has taken a beating over the last few days in line with rising crude prices. Foreign portfolio investors have turned net sellers and have pulled out a net of Rs 51,703 crore from Indian equities between January and February, leading to decline and volatility in equity markets.

The rupee has fallen over 1.4 per cent against the dollar, from $73.8 per barrel on January 12 to hit $74.84 on Tuesday.

Fund managers say markets are likely to remain volatile in the near term over the geopolitical concern.

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