Rising crude oil prices could push up your home loan EMIs. Here’s why

The Reserve Bank of India (RBI) could consider raising interest rates in response to a prolonged surge in Brent crude oil prices, warned Morgan Stanley in a new note.

If oil prices were to rise and remain above $110 per barrel, this could have a negative impact on India’s current account deficit and the rupee’s value.

Economists at Morgan Stanley suggest that sustained high oil prices would likely cause the country’s current account deficit to expand beyond the comfortable threshold of 2.5 per cent of GDP.

“Sustained higher oil prices would… mean that the current account deficit would likely widen to beyond 2.5 per cent of GDP – the comfort zone,” as per the Morgan Stanley note.

According to their estimates, a $10 increase in oil prices could lead to a 50 basis point rise in India’s inflation, assuming these higher costs are passed on to consumers. Additionally, it could widen the current account deficit by 30 basis points.

The RBI had previously increased the policy repo rate by 250 basis points between May 2022 and February 2023 to combat inflationary pressures within the Indian economy. As a result, the repo report jumped to 6.50 per cent.

This caused a notable surge in home loan EMIs, resulting in minimum interest rates of roughly 9 per cent or higher. Another repo rate increase could significantly impact individuals with home loans, potentially leading to further interest rate hikes.

It may be noted that the RBI has refrained from hiking interest rates in the past four policy reviews, but has kept the door open to hike rates further should there be a need.

Crude oil woes
The RBI’s inflation projections for the fiscal year 2023-24 stand at 5.4 per cent, based on an average crude oil price of $85 from October to March.

Presently, the Brent crude oil contract hovers near $85. India is among the Asian economies most exposed to higher oil prices, with an oil trade balance equal to -2.6 per cent of GDP.

One significant geopolitical risk to oil markets is the ongoing conflict between the terrorist group Hamas and Israel. Morgan Stanley anticipates that oil prices could reach $95 per barrel in the final quarter of this year, but then decline in 2024.

Should crude oil prices remain around $95 per barrel, the effects on India’s macroeconomic stability would likely be manageable. However, the potential inflationary impact could postpone the central bank’s anticipated “mild” cycle of rate cuts.

Morgan Stanley had previously projected that the Reserve Bank of India would commence rate cuts in the early months of the next fiscal year, between April and June.