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Crude oil prices always step in the spotlight when there are wars, geopolitical tensions or supply disruptions impact global markets. For India crude prices matter because the country relies heavily only on imported crude oil.
In all this supply chain there are billions of dollars involved as credits and payments among the nations. There is a need to keep a check on every payment and supply. So, the Reserve Bank Of India (RBI) pays special attention to oil prices because a single impulssive move up in crude can lead to inflationary pressures in the economy.
What Is Crude Oil?
Let’s start with answering a very basic question that comes first in our mind. Crude oil is a natural fossil fuel which is found beneath the Earth's surface. It is called ‘crude oil’ because it is raw in its form. This heavy tar type liquid is an unprocessed form, extracted from earth’s core fossil bed. It is not meant to be directly used for everyday purposes.
After extraction, the Crude Oil goes into refineries. It is then processed into many byproducts. This then becomes consumer friendly, as petrol, diesel, LPG and aviation fuel. Crude oil is further processed into making plastics, chemicals, synthetic fibres and several industrial products.
Why Does India Import Crude Oil?
India imports almost 89% of its crude oil requirement for its consumer and for day to day import exports. This makes the country highly dependent on global oil prices and international supply conditions.
Domestic production of crude oil in India is not sufficient to satisfy the total domestic demand. As a result, it is highly dependent on imports from other countries.
This shows the importance of the international price of crude oil for the Indian economy. If the international oil prices increase, the Indian oil companies and the country may have to pay more for the crude they import.
Since crude oil is usually traded internationally in US dollars, a falling rupee also increases the oil import bill of India, thereby further intensifying the strain.
What Happens When Crude Oil Prices Rise?
The impact of rising crude oil prices can spread across the economy.
As an example let’s analyse, an increase in transportation costs will also impact grocery costs or delivery charges. Travel costs can also increase when fuel costs go up. But retail fuel prices are not only influenced by crude oil costs. Taxes and refining costs, as well as exchange rates and government policies, also play a big role.
What Is Inflation?
Inflation means a general rise in the prices of goods and services over time. When prices rise, the purchasing power of money falls. In simple terms, the same amount of money may buy fewer goods than it did earlier.
For families, College students and everyday consumers, high inflation can increase spending. Specially on essentials such as food, transport, electricity and other household requirements.
Why Does the RBI Watch Crude Oil Prices?
Recently The RBI has warned that volatile crude oil prices amid the West Asia conflict could push risks for India’s inflation outlook. The current and future rise in oil prices could drive up fuel, transport and production costs leading to higher consumer prices. The RBI is closely monitoring this situation in its assessment of future policy decisions.
The basic agenda of the whole organisation as the Reserve Bank of India is to look at the monetary expenses and money flow in the economy. The Reserve bank of India keeps the economy moving. It has the authority to look into indices that influence any dip or spike inside the nation.
The RBI monitors crude oil prices because they can influence inflation. The process is directly proportional to oil prices. High oil prices can increase transportation and production costs, which may put upward pressure trends on the prices of different goods and services. This happens vice versa as well. If in any situation, the crude oil prices go lower, the inflation cools down quickly.
This is important for the RBI because maintaining price stability is one of its key responsibilities. The Monetary Policy Committee (MPC) considers several economic factors, including inflation, growth and global developments, while deciding monetary policy.
What Can RBI Do When Inflation Rises?
One of the RBI's important monetary policy tools is the repo rate.
What Is the Repo Rate?
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Key Aspect
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Description
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Role of the Repo Rate
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Serves as a primary monetary policy tool for the RBI to manage inflation and stabilize the economy.
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Definition
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Represents the interest rate at which commercial banks borrow money directly from the RBI.
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Impact on Borrowing
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Adjustments to this rate alter borrowing costs for banks, which directly influences interest rates for businesses and general consumers.
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Demand Management
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Raising the rate makes loans more expensive, curbing spending and overall market demand to lower inflationary pressure.
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Measured Approach
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The RBI avoids automatic rate hikes during crude oil price spikes, choosing instead to evaluate if the inflation risk is temporary or persistent alongside broader market trends.
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How Do Crude Oil Prices Affect Students and Families?
Rising crude oil prices can eventually affect everyday expenses, including:
- Higher petrol and diesel costs
- Increased bus, cab and travel expenses
- Higher transportation costs for food and groceries
- More expensive delivery services
- Increased household expenses