Why in the News
The ongoing conflict involving Iran, Israel and the United States has pushed up oil prices and disrupted energy supplies. Analysts believe the situation may slow India’s economic growth, while the Reserve Bank of India (RBI) is likely to keep interest rates relatively low.
Key Economic Developments
- Oil prices have risen about 15% after the conflict began.
- The Indian rupee has hit record lows and bond yields have risen.
- Financial markets saw sell-offs in equity, debt and currency markets.
- These developments have raised concerns about India’s current account deficit and growth outlook.
Impact on India’s Economy
- Slower Economic Growth: Disruption of natural gas supplies from the Middle East may affect sectors such as:
- Fertilizers
- Power generation
- If disruptions last more than four weeks, growth could be affected for at least a quarter.
- Oil Price Risk: If crude oil prices stay above $90–95 per barrel for several quarters,
- India’s growth may slow from above 7% to around 6.5%.
- Pressure on External Balance: Higher oil prices can:
- Increase India’s import bill
- Widen the current account deficit
- Depreciate the rupee.
Inflation Outlook
- Despite higher oil prices, inflation risks remain moderate.
- India’s retail inflation was 2.75% in January, near the lower end of RBI’s 2–6% tolerance band.
- A 10–20% rise in global oil prices may increase inflation by 25–50 basis points.
- Government actions such as holding retail fuel prices steady or reducing excise duties may cushion inflation.
RBI’s Likely Policy Response
- RBI had already cut the repo rate by 125 basis points in 2025.
- Policymakers may prioritise supporting economic growth rather than raising rates immediately.
- However, if oil prices cross $100 per barrel, central banks globally may adopt a more hawkish stance.
| [2023] Consider the following statements: Statement-I: In the post-pandemic recent past, many Central Banks worldwide had carried out interest rate hikes. Statement-II: Central Banks generally assume that they have the ability to counteract the rising consumer prices via monetary policy means. Which one of the following is correct in respect of the above statements? (a) Both Statement-I and Statement-II are correct and Statement-II is the correct explanation for Statement-I (b) Both Statement-I and Statement-II are correct and Statement-II is not the correct explanation for Statement-I (c) Statement-I is correct but Statement-II is incorrect (d) Statement-I is incorrect but Statement-II is correct |
