Crude is rising as tension in Saudi Arabia increases. The recent drop in petrol prices by Rs 2, after the government cut the excise rate by Rs 2 on petrol and diesel has been proved ineffective as rising crude prices offset this reduction.
Why are crude prices rising?
Crude oil has now hit $65 a barrel, the highest level seen since 2015. The rise has largely been on developments in one of the biggest crude producers in the world - Saudi Arabia.
According to reports Saudi King Salman would relinquish the throne to his son Crown Prince Mohammed Bin Salman next year. Mohammed Bin Salman is consolidating his position with an anti-corruption crackdown, which has resulted in crude prices flaring on account of tensions in Saudi Arabia.
Rising crude prices pose a threat to the economy
Crude prices pose a serious threat to the Indian economy. It is likely to stoke inflation, which is unlikely to see interest rates falling any further. CPI inflation, which is likely to be revealed on Monday, is likely to come in at a seven month high. This means the RBI is unlikely to cut interest rates and if the inflation trend continues it may go ahead and hike interest rates.
US Brent at $65, may accelerate India's current account deficit by $5 billion to $ 5 billion. Already, the reduction in excise on fuel would mean an additional burden on the government for Rs 13,000 crores this year and Rs 25,000 crores next year.
A constant increase in crude prices would thus push the fiscal deficit higher. The last three years have seen crude prices being very stable. However, the MODI government has its task cut out. In fact, if crude prices rise dramatically and inflation rallies, it may pose problems for the re-election of the present government.