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Oil Prices Surge To 4-Year High; Emerging Economies Feel The Pinch

Summary

Oil Prices surged to a four-month high on Thursday.

Amidst macroeconomic challenges of inflation and currency devaluation, emerging economies such as India that have been reliant on oil imports have been hard hit.

Further interest rates in emerging economies will be necessary to stave off inflation.

Oil prices surged yesterday morning hitting a four-year high. As of this writing, the NYMEX Crude Oil Front was trading at 74.31. Amidst the backdrop of optimistic expectations on the US economy and rising US interest rates, rising oil prices present an additional constraint on emerging markets -- many of whom continue to grapple with currency devaluation, high inflation, and difficulties attracting foreign investment. For countries that rely on oil imports -- Such as India -- higher oil prices exert upward pressure on inflation. 

India's Rupee fell to its lowest historical record on Thursday, trading at 73.76 against the greenback. In an attempt to curtail inflation, the government responded with: price cuts to diesel and petrol, measures to make it easier for investors to purchase rupee bonds, and raised tariffs on imported goods. The latter two measures were aimed at reducing the flow of money out of the country. Despite the government's best efforts, the Rupee continued its decline well into Friday. 

The Indian Central Bank was expected to provide further relief in the form of an interest-rate increase to prevent further devaluation of the Rupee; however such increases have yet to transpire. The Indian Central Bank decided against hiking rates - defying expectations that the body would act to protect the Rupee. 

While India has performed well -- achieving 8.2% growth in the most recent quarter, analysts suggest that the Indian economy will likely encounter more problems as it continues to experience challenges attracting foreign investment as well as high inflation. As a consequence, many analysts expect another interest rate hike in the near future.