RBI Governor, FM out of sync on oil shock

Tag : blco crude
The unprecedented oil summit in Jeddah seems to be of little helpas far as oil prices are concerned. Crude oil continues to inchcloser to the 140 dollar a barrel mark but back in India, thefinance minister and the RBI Governor are out of sync over fuelprices.

''Last time I spoke about inflation was around budget. That timecrude was 100 dollars. No one in his wildest dreams anticipatedthis. Since then it has gone up by 40 per cent,'' said PChidambaram, Union Finance Minister.

''Six months ago central banker of oil exporting country told methat they were working under three scenarios - oil at 50, 100 and150. We knew this could happen six months ago,'' said Y VenugopalReddy, Governor, RBI.

So why are the two top policy makers of this country, once againsounding out of sync on whether they were aware oil prices could goup. Once again they have indicated that North Block and Mint Streethave different take on how to tackle the oil shock.

About 24 hours after this high profile meeting at Jeddah ended, itis clear that it has achieved precious little.

The oil prices have not even reacted to all the noise made bycountries like India and Saudi Arabia, instead it has inched upcloser to 140 dollars to a barrel. This indicates that during timesof panic, production increases but it doesn't lower the prices.

The proposal of oil band by Chidambaram is clearly a wish, whichmay not even see the light of the day.

''Suggestion is that producing countries will assure prices willnot rise above a level and consuming countries will assure thatprice won't fall below a level within the band prices can bedetermined,'' said Chidambaram

But can this really work? It may, only if finance minister looks atthe past and it will become clear that price bands don't work andespecially when Saudi Arabia alone doesn't influence OPEC.

In 1999-2000, when OPEC introduced a price band of $22-to-$28/bbl,it was forced to abandon it in less than five years.

Beyond the blame game, however, lies the more contentious issue ofhow India will tackle the oil shock.

Will it be pure demand management through interest rates, left toRBI as desired by North Block or will the logjam continue on theright prescription to the problem?