Impact of Oil Inflation on the Indian Financial Markets and Indian Macroeconomic Landscape

- Considering the fact that India imports nearly two thirds of crude from the international markets , the implications of price volatility is far reaching on India's external trade, balance of payments, currency stability, interest rate scenario and India's overall macroeconomic management including India's financial sector. Such a huge dependency upon imported crude has given rise to the concept of imported inflation, wherein high international prices get seeped into our economy and creates pressure. High inflation compels the Reserve Bank of India to stiffen the rates which in turn discourages firms to take up more expansion plans. This affects the quality of earnings and this in turn makes the stocks come under pressure. Moreover, high inflation forces the investors to demand more premium as insulation from inflation which raises the cost of equity. Moreover with high policy rates, bond markets come under pressure too because at times of high rates, existing bond holders (including banks and financial institutions) tend to liquidate their bond holdings because they suffer treasury losses. This article attempts to study the impact of imported inflation emanating from volatile crude oil prices and supply shocks upon India's overall macro economy as well as India's financial markets.