It is no surprise that interest rates on bonds have spiked after crude oil prices touched their highest level in four years. Indicators of Indian macro stability—inflation, fiscal deficit and current account deficit—are sensitive to the gyrations in international energy prices.
The Narendra Modi government took charge in May 2014 when a barrel of Brent crude was priced at $110. These prices fell sharply after that, first to less than $50 by the end of the year and then all the way down to $28 by January 2016. The collapse of crude oil prices helped the finance ministry in managing the budget and the Reserve Bank of India in beating inflation.
Is the recent rise in crude oil prices above $70 a barrel a temporary phenomenon because of a fresh round of geopolitical tensions in West Asia? It is very difficult to say, but it is important to remember that the Indian central bank recently pushed up the base price of crude oil from $55 to $68 a barrel in its inflation forecast model. That surely tells us something.