Mumbai Investment：Low oil prices bright spot for Indian economy？ Why is Finance Ministry feeling positive about recent reductions

With recent reductions in crude oil costs, Nirmala Sitharaman-led Finance Ministry in the monthly economic review for August has expressed relief by saying low prices will be a bright spot for India as it worries about risks of eventual correction in global stock markets that may have spillover effects.Mumbai Investment

"Consequently, the risk of an eventual correction has risen. If the risk materialises, the spillover effect may be felt globally as well. Amidst these concerns, low oil prices are a bright spot for the economy," said the government review.

Oil prices dropped on Thursday, reversing earlier gains, as news of top exporter Saudi Arabia giving up its crude oil price target in preparation for expanded production weighed on the market.

Brent crude futures were down 55 cents, or 0.75%, to $72.91 a barrel, while U.SAgra Investment. West Texas Intermediate crude fell 55 cents, or 0.79%, to $69.14 per barrel as of 0502 GMT.

A reduction in crude oil prices in recent weeks has improved margins on retail auto fuels, providing state-owned firms a headroom to cut petrol and diesel prices by Rs 2-3 per litre, rating agency Icra said on Thursday. The price of a basket of crude oil India imports averaged $74 per barrel in September, down from about $83-84 a barrel in March when petrol and diesel prices were last cut by Rs 2 per litre.

With India needing to import 80% of its oil needs, a report by BofA Securities showed that a 20% drop in crude prices could result in annual savings of approximately $13 billion for every $10/barrel decrease. This would further strengthen the country's external finances, as the Reserve Bank of India (RBI) has already added $67 billion in foreign reserves in 2024 alone.Jaipur Investment

Brent crude prices, which recently dropped to $70/barrel — the lowest since December 2021 — remain below $75/barrel, marking a 20% decrease from the April peak of $92/barrelSimla Stock. The report also noted that increased imports of discounted Russian crude have contributed to reduced energy costs for India.

Crude prices have witnessed a sharp decline in the last few months, primarily due to weak global economic growth and high US production and the OPEC+ has pushed the rollback of its production cuts by two months to combat the declining prices.

A decline in the price of crude oil -- which is converted into fuels like petrol and diesel at refineries -- had rekindled hopes for a reduction in petrol and diesel rates that have been on a freeze for over two years now barring a pre-election reduction in March.

While petrol and diesel pricing is deregulated (meaning oil companies have the freedom to fix retail rates), the state-owned fuel retailers, Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd (BPCL) and Hindustan Petroleum Corporation Ltd (HPCL), have rarely used this freedom since late 2021 by not revising prices in line with cost.

To be sure, crude oil prices remain vulnerable to various risks such as production cuts, political instability in certain regions, or escalations in geopolitical tensions. Significant fluctuations in fuel prices can cause disruptions, and analysts believe the government may adopt a wait-and-see approach for the coming months.

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