Brent Prices Hit 4-Year Low: How it Impacts You - NDTV

Global oil prices are sliding fast, with Brent prices hitting a four-year low on Tuesday. Brent has slipped in to bear territory as prices have fallen by 25 per cent from their 2014 high in June. Oil prices are falling because supplies have risen and global demand has slowed. The sharp fall in oil prices is good news for both consumers and the Indian economy.

Here's your 10-point cheats-sheet to understand the impact of weak crude prices:

1) Petrol prices, which are deregulated, have been falling steadily. After Tuesday's cut of Rs 1 per litre, petrol prices have hit a 16 month-low.

2) Diesel prices are controlled by the government and have not seen a cut in over five years. But analysts expect diesel prices to fall as state-run refiners have started making a profit on selling diesel.

3) A cut in diesel prices will immediately impact inflation because diesel is the most used fuel product in the agriculture sector and the transportation industry, both of which have a direct bearing on food prices.

4) A secular decline in inflation will create headroom for the Reserve Bank of India to reduce interest rates. The central bank has kept rates on hold since raising it by 25 basis points in January. An early cut in interest rates will help revive domestic investment and demand and support growth.

5) Easing inflation will leave more money in hands of consumers. This will boost spending as disposable income will rise and incentivize savings as real rates (interest rate minus inflation) will go up.

6) Higher spending by consumers will push demand and lead to higher profitability for corporates as the overcapacity in many industries will be absorbed. Once the overcapacity in industries is absorbed, corporates will plan capacity addition to cater to a growing economy. This will lead to capital expenditure and economic growth.

7) A revival in corporate capex cycle will also help the banking sector as credit offtake will increase. Concerns over recovery of bad loans, which are estimated at $100 billion or about 10 per cent of all loans, will also ease leaving more capital for lending in a growing economy.

8) India is the world's fourth biggest energy user, but imports three-fourth of its domestic requirements. Costly fuel payments add to current account deficit and are a drain on precious foreign exchange. As crude prices fall, the import bill will go down leading to narrowing of the current account deficit. This will be positive for the rupee too.

9) The government will also be able to meet its ambitious target of restricting fiscal deficit to 4.1 per cent of GDP as it will require less money for subsidies, which cost 2.2 per cent of GDP in 2013-14 fiscal. Lower fiscal deficit will reduce government borrowing and increase spending on asset creation (capital expenditure), which will add to economic productivity.

10) Lower government borrowing will help reduce crowding out in the domestic debt market and will make credit cheaper for corporates. (Crowding out occurs when government finances its deficit through borrowing from the market there by leaving less money for corporates effectively "crowding them out").