Rise in oil prices

A rise in oil prices directly affects the current account and fiscal deficit as well as has an indirect effect on investment, consumption and monetary policy. Indian is becoming increasingly dependent on crude oil imports over the past few years. Current Account Deficit is an indicator of how much India owes the world in foreign currency. The rise in crude oil prices raises the current account deficit and spells bad news for the economy.

Due to rise on oil prices, the stock market comes under a lot of pressure as a lot of companies depend heavily in crude oil prices. When the crude oil prices become too high, there is seen a sell-off in small and mid-cap securities. The profitability of company’s dependent on crude oil decreases and value of their stocks falls down. Apart from being used for domestic fuel needs, oil is also used as a raw material in several industries.

A rise in price of oil has a direct impact on prices of many goods and services as the cost of production goes up, giving rise to inflation. Industries like Airline, Plastics, Chemicals, Tyres, Footwear, Paint, Lubricants, etc. epend on crude oil as raw materials for their final products. A rise on oil prices means higher cost of production, which adversely affects their profit margins. Cost-push inflation that arises from rising oil prices comes as a dilemma for policy makers. Usually, higher interest rates policy is used to tame inflation.

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