US sanctions on Iran, rise in crude oil prices stoke inflation fears

G Naga Sridhar Hyderabad | Updated on April 29, 2019 Published on April 29, 2019

The United States (US) government’s sanctions on oil imports from Iran and the subsequent rise in crude oil prices are driving up the risk of higher inflation in the country.

The US Government had last week made it clear that India needs to cut oil imports from Iran to zero to avoid sanctions.

Crude oil imports have been growing in double digits in value terms (at about 15 per cent during 2017-18 compared to the previous year as per Govt data), and the rise in price will have a sure impact on domestic economy in a big way as the increase will be passed on the consumers.

This will trigger a spin-off effect on prices. India imports about 180 million barrels per annum from Iran.

Headline inflation, which is a measure of total inflation in the economy including the prices or oil and gas, has been on the decline for the last one year and had even turned into deflation in February.

According to a recent Reserve Bank of India (RBI) survey, inflation expectations of urban households declined by 40 basis points in March compared to December last year.

As per the RBI projections, based on forward looking surveys, CPI inflation is expected to pick up from 2.9 per cent in the first quarter of 2019-20 to 3 per cent and 3.8 per cent in the second and fourth quarter respectively.

However, the present global scenario, post US sanctions, might have an adverse impact on inflation as major upside risks include disruptions/changes in the global crude oil markets.

Even though global crude oil prices have declined over the last six months, there is a need to be cautious as short and medium term outlook still remains uncertain. If the US-Iran stand off could lead to any higher demand and oil supply gets constricted one can expect pressure on oil prices.

“Assuming an increase in the Indian basket crude oil prices to around $77 per barrel, inflation could be higher by 30 per cent and growth could be weaker by 20 bps,’’the RBI said in a recent report.

It remains to be seen if the crisis will escalate to a serious inflationary issue for India that could eventually harden the just softened monetary policy of the RBI, placing growth in jeopardy.

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Published on April 29, 2019
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