Interest Rate: Morgan Stanely has estimated that the Reserve Bank of India will resume hiking interest rate if the oil price soar to $110 per barrel. As per the report, a $10 increase in oil prices boosts inflation by 50 basis points and contributes to a 30 basis-point widening in the current account balance.
Being the world's third biggest consumer of oil, India is one of the most exposed economies in Asia to the rising crude prices. The investment bank said that oil above $110 a barrel would be destabilizing for India’s economy resulting in higher domestic fuel prices and second-round inflationary effects.
The Current Account Deficit may also widen beyond the comfort level of 2.5% of Gross Domestic Product.
“With macro stability indicators stretched under this scenario, we think currency depreciation pressures could rise and lead the Reserve Bank of India to restart its rate hike cycle,” Morgan Stanley’s economists led by Chetan Ahya wrote in a note on Sunday.
As per Morgan Stanley, the economy could be manageble if the oil prices are sustained at $95 a barrel.
The RBI has kept its policy rate unchanged four times in a row as the inflation remains above the 4% midpoint of its target band. RBI's forecasts are based on a crude oil price of $85 a barrel in the second half of the current fiscal year, which ends in March 2024.