Brent Crude Oil Jumps 25% Amid Iran War, Nirmala Sitharaman Says Inflation Impact Limited

The Iran war has resulted in the price of Brent crude oil in the world market increasing by more than 25% in one day on Monday, touching $107 a barrel-the highest in four years. It is a relief that this will not affect our inflation rate in the country in a major way.

Finance Minister Nirmala Sitharaman told Parliament on Monday that the rise in crude oil prices will have a small impact on the retail inflation rate in the country. In her written reply to Parliament, Ms. Sitharaman said, “Inflation is at a low level and this will help keep the rise in crude oil prices in check.”

He stated that international crude oil prices had been falling for the past year before the start of the Iran war on February 28th. The current inflation rate mitigates the impact of the oil price increase, and no assessment has yet been made of the impact of the increase in crude oil prices on inflation.

The retail inflation rate for January this year was recorded at 2.75 percent. The RBI has set a retail inflation band of four percent. The RBI considers inflation above six percent to be uncontrollable. Therefore, given the current inflation rate, even if inflation increases due to crude oil, it will remain below the maximum limit.

According to the RBI, if crude oil prices rise by 10 percent above the baseline (70 dollars per barrel) and the entire burden of that increase is passed on to retail prices, inflation will increase by 30 basis points. However, the government has not yet made any changes to the retail prices of petrol and diesel.

Sitharaman stated that the impact of rising crude oil prices in the medium term will depend on global supply chains and currency exchange rates. Previously, crude oil prices crossed $100 per barrel in 2022, at the beginning of the Russia-Ukraine war.

However, experts indicate that rising crude oil prices have led to higher prices for plastic granules and other related raw materials used in manufacturing. Rising import logistics costs will also increase the cost of raw materials, potentially impacting inflation.

However, under pressure from oil prices, the rupee reached 92.23 against the dollar on Monday. On Sunday, the value of one dollar was 91.94 rupees. Over the past 10 days, the rupee has declined by 1.15 rupees against the dollar.

It is being reported that rising crude oil prices could further weaken the rupee. Rising oil prices will increase the import bill and impact foreign exchange reserves. A weakening rupee will also increase the cost of other imported goods.

Due to the war, international speculators appear to be shifting their interest from gold and silver to crude oil and the dollar. This is why gold prices softened on Monday. Investors are prioritizing dollar purchases given the dollar's strengthening trend.