Oil Over $90 A Barrel Will Add To India's Inflation Woes, Says Nomura

A rise in crude oil prices beyond $90 per barrel, along with a rise in food prices, is likely to be a double-whammy for Asian economies, including India, according to Nomura.

India's latest headline inflation stood at 6.83% in August, above the Reserve Bank of India's tolerance band of 4% (+/- 2%).

On the Intercontinental Exchange, the most active December contract of Brent futures rose over 8% to $93.39 a barrel on Monday, compared with $86.23 at the beginning of the month. Since the end of June, the oil prices have risen 30%.

India depends on imports to meet 80% of its crude requirements. Since it's a net importer of crude oil, the consumer price inflation index may see a rise of 25 basis points for every 10% rise in prices of the commodity, Nomura Global Markets Research said in a note on Friday.

"We expect weaker growth, higher inflation and worsening twin current account and fiscal balances, if oil prices remain high," Nomura economists said.

Among Asian economies, India, Thailand and the Philippines are most prone to economic weakening due to higher oil prices, Nomura said.

However, with the government's efforts to control prices by offering subsidies, India and Thailand may be able to evade some of the shocks, Nomura said. Yet, the current account balances of both the countries remain vulnerable, which may result in currency depreciation going ahead, it said.

"Compared to past cycles, we expect less of a pass-through to CPI inflation, due to subsidies and retail price controls, as many governments aim to shield consumers from higher costs," the note said. Despite that, CPI inflation may see a rise of about 20 basis points on an average for a 10% oil price increase.