Introduction

• Indian Rupee has appreciated against the US Dollar in recent week due to the fall in global crude oil prices.
• Since imported oil meets about 80% of India’s total demand, the fortunes of the rupee have been tightly linked to the price of crude oil in the global markets.

Why is there a fall in global crude oil prices?

• Continuation of supply of crude oil from Iran after U.S. has softened its stance against Iran.
• S. turned into the largest crude oil producer in the world with the boom in shale production.
• Lowering of projection of demand of crude oil
• Faltering growth in major economies like China may have also contributed to the fall in prices.

Benefits for India

• The fall in global crude oil prices comes as a big relief to the Central government, which has faced increasing macroeconomic and political pressure due to rising prices.
• A drop of $10 in the price of oil can improve India’s current account and fiscal deficits by 0.5% and 0.1% of GDP, respectively.
• The ruling party may be pleased with falling oil prices in the run-up to the general elections next year.
• Fuel prices across major Indian cities have fallen significantly.
• The Reserve Bank of India will be relieved as it will have to worry less about the rupee and oil-induced inflation.
• Foreign investors, who have been net sellers this year, have turned net buyers this month.
• This points to an increase in investor confidence in the economy as the fundamentals improve.

Conclusion

• Amid rising global uncertainties, it may not be so easy to map what lies ahead for global crude oil prices and the rupee.
• Forthcoming meeting of the Organisation of the Petroleum Exporting Countries will make clear the response of oil producers to the sharp fall in prices.
• Shale companies are also likely to respond to falling prices by cutting production.
• India should capitalise on the relief offered by the fall in oil prices to improve its preparedness for any future jump in oil prices.