Morgan Stanley (NYSE:MS)'s team has issued a warning that sustained oil prices at $110 per barrel could destabilize India's economy and potentially force the Reserve Bank of India (RBI) to restart its rate hike cycle. The warning comes as India, being a major global consumer of Brent Crude, faces significant exposure to oil price volatility.
According to the financial services firm, a $10 increase in oil prices could result in a 50 basis point inflation rise and a 30 basis point expansion in the current account balance. If prices surpass $110 per barrel, it could lead to higher domestic fuel costs and subsequent inflationary effects. This scenario would push the current account deficit beyond the comfortable 2.5% of GDP and cause currency depreciation pressures, necessitating RBI's interest rate hikes.
The RBI has maintained its policy rate four times so far but has shown a hawkish stance as inflation exceeds its 4% target midpoint. The bank's projections are based on an oil price of $85 per barrel for the second half of the fiscal year ending March 2024. In contrast, Morgan Stanley forecasts a more manageable average oil price of $95 per barrel.
The report also highlighted that foreign direct investment (FDI) declined from $70 billion in Q2 2021 to $33 billion in Q2 this year. However, despite this drop, India's share of global FDI flows increased.
Lastly, Morgan Stanley pointed out that the upcoming elections pose a significant risk with the potential emergence of a weak coalition government. Such a scenario could prioritize redistributive policies over boosting capital expenditure and implementing supply-side reforms, adding another layer of uncertainty to India's economic outlook.
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