The Current Oil, Inflation & Rupee Scenario

The movement of oil prices in the world markets has brought about the setting in of some important changes. Free markets like the United States or the Socialist ones like India have had to accept the fact that the very structure of the world economy is changing. We once viewed the 100 dollars per barrel of oil as an indication to push the panic button but after everything that has happened in the past one year there is an inclination to believe that this figure despite being regarded as ‘high’ is still a ‘realistic’ expression of the oil scenario.

We have witnessed that the price of oil has been slowly coming down but not before the governments of the world interfered in some way. For starters, they realized that there were two ways to deal with the problem. Firstly to use the OPEC meetings as a means to persuade oil producers to produce more oil in an effort to match supply with demand for oil.

The second way was to strictly monitor the oil markets to make sure that the speculation over the price of oil does not set in hence leading to inconsistent buying and selling frenzies. These two primary steps have brought down the level of oil to where it is today.

But it has made amply clear that the World is consuming a lot more oil than even a year ago and that this is a long term situation that needs to be immediately dealt with.

For India the cooling of oil prices has helped the rate of inflation to slightly decrease. Today’s inflation figures show that the figures have fallen for the third week in a row. It is however premature to say that the grip of inflation has melted away. India is still dealing with double digit inflation and is battling a crisis with the rising prices of commodities. Some food items cost less but there are still many that cost way more than before.

It is however a positive step for India to have been able to bring inflation down to this week’s level of 12.1%.Much of this has been also due to the tight credit policy wielded by the RBI in addition to the fall in crude prices. Interest rate hikes by the RBI have tightened the supply of credit in the market and while the RBI still mulls over another interest rate hike, there is still a lot of work to be done on this front.

The RBI has however been very liberal with the falling Rupee. Even though the RBI is responsible in making sure that it didn’t fall past the 45.05 mark which is a two year high as of today’s closing against the Dollar, the fact does remain that the market expected them to do a lot more to curtail the rate and strengthen it. The RBI has maintained that the falling  Rupee is a short term trend wherein people are buying more Dollars and that this will not last once the situation stabilizes.

So while the Indian economy cheers the marginal fall in inflation and the moderation in oil prices, the falling Rupee is definitely a concern.