A prolonged breach of this level, however, may increase the chances of interest rate hikes.
Oil Above USD 100 May Push Inflation Past RBI Limit, Rate Hike Risk: HSBC
Rising global crude oil prices are emerging as a key risk factor for India’s inflation outlook, with levels above USD 100 per barrel likely to push retail inflation beyond the 6 percent upper limit set by the Reserve Bank of India.
Economists have indicated that inflation, measured through the consumer price index, could remain within the central bank’s tolerance band if crude prices stay below the USD 100 mark on average. A prolonged breach of this level, however, may increase the chances of interest rate hikes.
Key takeaways from the analysis:
- Crude oil above USD 100 per barrel may drive inflation beyond 6 percent
- Sustained price pressure could lead to a tightening of interest rates
- Using interest rates to support the rupee may carry economic risks
- High oil prices can place uneven pressure on overall economic growth
The assessment comes ahead of the central bank’s upcoming bi-monthly monetary policy announcement, where there is ongoing discussion around the possible use of interest rates to manage currency stability.
On policy direction, economists have suggested maintaining a neutral stance across both monetary and fiscal fronts. This recommendation is based on the view that supply conditions are yet to fully stabilise, and any demand-driven push at this stage could further elevate inflation.
In fiscal terms, a neutral approach would involve:
- Keeping the fiscal deficit close to the projected level for the 2025–26 financial year
- Using adjustments in petrol and diesel prices as a tool to help manage the deficit
The analysis also pointed to broader risks, noting that if elevated energy prices persist for several more weeks, the resulting pressure on economic growth could become more significant than the direct impact on inflation.
