Crude above $87 stokes inflation, growth worries

Oil prices have risen above $87 per barrel on fears of Mideast tension disrupting supply in a tighter market, triggering inflation and growth worries for the country. If crude prices sustain at current levels for a month or so, it will start transmitting into fuels and freight and trigger inflation, according to economists.

"If oil prices keep moving up or remain at these levels, inflation pressures will be alive and kicking, which could ultimately transfer into interest rates and bond deals. That might start having an impact on growth," said Abheek Barua, chief economist at HDFC Bank. He's expecting oil prices to stay in the range of $80-85 per barrel and inflation of 5.9% in the current quarter and 5.2-5.4% in the next.

The central government may go for a token fuel duty cut ahead of assembly elections next month, Barua said.

High prices will inflate the import bill, putting pressure on the currency, according to Madan Sabnavis, chief economist at Bank of Baroda. "But prices have been so volatile, we don't know how long they will last at the current levels."

The government might have to rework its figures as it finalizes the budget since the current oil prices might have overshot its assumed rate, Sabnavis said.

Goldman Sachs expects oil prices to hit $100 per barrel in the second half of 2022 on increased supply disruptions and OPEC+ shortfalls.

Crude oil prices have rallied since the beginning of last month, gaining a quarter or $18 per barrel, as markets shifted their focus away from the fears of Omicron denting demand to supply constraints. Crude had lost about $12 per barrel in the last week of November on fears that the latest mutant of coronavirus could trigger large-scale travel restrictions and hurt oil demand.