10% Rise In Crude Oil Prices Can Increase Inflation By 20 Basis Points: RBI Study

A 10% rise in global crude oil prices can increase inflation by around 20 basis points, according to a study by the Reserve Bank of India.

Although the passthrough to retail prices has remained contained with active government intervention, increasing dependence on crude oil imports may have inflationary consequences in the long run, warranting constant vigilance and careful monitoring of its potential impact, the report concluded.

The paper studies the crude oil-domestic price relationship using a sample spanning 2009-10 to 2023-24 and estimates the impact using a suite of models.

The results indicate that the impact of global crude oil price changes on India’s headline inflation has increased to some extent since the deregulation of domestic petrol and diesel prices through the direct and indirect channels.

Still, the impact has remained largely range bound due to active management of pump-prices, limiting spillover to domestic inflation from large fluctuations in global crude oil prices. This primarily reflects the role of government measures in containing fuel inflation as domestic fuel prices are often conditional upon government policies on excise duties of petrol and diesel.

As current international prices are moderating consistently owing to increase in supply and fall in demand due to global economic slowdown, this augurs well for inflation as indicated by the limited passthrough to domestic prices. However, increasing oil demand and growing oil import dependency may lead to higher susceptibility to global oil price shocks through the direct and indirect channels over a longer time horizon, warranting more intensive intervention to limit the impact of spillovers.

While there is no direct impact of higher international oil prices on CPI, persistent increase in oil price can impact WPI and core (excluding food and fuel) in the form of higher transportation and input costs. It also has the potential to unhinge inflation expectations, thus changing the inflation path. Higher energy prices can raise inflation expectations of consumers and businesses, indirectly exerting pressure on food and core inflation.