- The US-Iran war has caused the largest oil supply shock in global economic history, Gita Gopinath said
- India faces cost pressures and rupee depreciation due to its dependence on oil imports, she said
- Rupee adjustment is advised to maintain demand for rupee assets amid market pressures
The US-Iran war has led to the biggest oil supply shock the world economy has ever faced and it can only get worse before it gets better, Harvard Professor and former Deputy Managing Director of the International Monetary Fund or IMF, Gita Gopinath, has told NDTV.
In an exclusive interview with NDTV's Senior Managing Director Vishnu Som, she said for India, which is largely dependent on imports for its fuel needs, it is putting pressure in terms of costs as well as the rupee.
The big fallout of this will be a cutback in imports. But at the same time, exports will also go up and so would the earnings, so that companies will see higher profit margins, she said.
"Because rupee's value is determined not just by people's demand for imported goods or for rest of the world's demand for Indian goods, but it is also about what's happening in financial markets and the demand for rupee assets. And if it is seen that the rupee is not really at its true fundamental level, but is being artificially held out, then you will see less demand for rupee assets and that will be kind of self-defeating because that would put further pressure on the rupee. So at this current moment, it seems that the right policy would be to let the currency, let the rupee adjust," she added.
Gopinath also endorsed the Prime Minister's suggestion of cutbacks in fuel usage.
"If this conflict continues for a few more weeks, the right reaction is for there to be a cutback in usage of all these fields," because the petro prices are "expected to rise further," she said.
All the price hike, though, may not be passed on to the people. "Some of it will be absorbed by the oil marketing companies, (and some) by the government because it will run a somewhat larger fiscal deficit in the near term," she said.
The tough part, she said, is not knowing how long then war will continue. If it takes longer than another two or three months, the right thing to do is to intervene now.
While some of the fuel price hike can be passed on to the people, for vulnerable households, continuing direct cash transfers will be the way to go.
Asked if India's GDP will be badly hit if the war continues for longer than a month, Gopinath said, "If it goes on for another month, India, along with many other countries, are facing a much worse situation".
In view of the supply and demand both dropping, "we are looking at oil at $140 or $160 a barrel by the end of June".
"Everybody expects that there will be a resolution to this conflict in the near term, because they think that the US administration is not going to want to be in that situation where oil prices shoot up as much as that," she said. But this, she said, could just be "hopeful thinking".
"We can't be sure that that's how it will end. So if we get to $140, $160 a barrel, then that is a much more serious hit to global growth broadly, and of course, to the Indian economy, because India does rely more heavily on that region for its energy," she added.
