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.
