Crude oil prices could climb to $120 a barrel before cooling off, says SBI's Soumya Kanti Ghosh

Crude oil price could rise to $120 a barrel near-term before easing, State Bank of India Group Chief Economic Advisor Soumya Kanti Ghosh said. He added that prices above $110 a barrel would difficult for India to sustain from an import-bill perspective.The forecast follows an earlier call Ghosh made in mid-August, when he predicted oil would cross $100 per barrel — a level it has since surpassed, trading around $108 per barrel.

He said the rally is mainly geopolitical rather than driven by demand-supply gaps, pointing out that the International Energy Agency had forecast prices near $60 per barrel in February, before the conflict pushed them sharply higher.The oil price pressure is compounding stress elsewhere. Ghosh warned that the rupee is likely to weaken further and that India's 10-year bond yield could cross the psychological 7% mark if US Treasury yields keep climbing toward the 5% level, a scenario he linked to a widening US fiscal deficit and a hawkish Federal Reserve.Because India imports the bulk of its crude, the country pays a premium of $10 to $15 a barrel above the international Brent benchmark, according to oil marketing company estimates cited earlier in the discussion.

That means a $108 per barrel Brent price already translates to a landed cost closer to $118–123 per barrel for Indian refiners — a gap that would widen further if Ghosh's $120 per barrel forecast plays out.Ghosh said the rupee has already crossed 96 against the dollar and expects further depreciation, particularly after the Reserve Bank of India's FCNR — a special deposit scheme for non-resident Indians — window closes.

He said the central bank's key task now is exchange rate management, since letting the rupee run unchecked risks becoming a self-fulfilling depreciation spiral.This is an edited transcript of the interview.Q: I remember that prediction of yours. I think it was around the 17th of August when, in your report, you said oil would cross $100 per barrel, and I think it's done a little better than that now. So about $108 per barrel —not great news.

We had an oil analyst with us yesterday morning who told us that we are importing oil, and based on his conversations with oil marketing companies, etc., at a $10-$15 premium to the Brent price. So, oil was at $100 per barrel, so we were paying $110-$115 per barrel. Hopefully we're not going to stay here for a long time, and prices quickly come down. But this is material, isn't it? A: I think when we made the prediction about oil around August that it would cross $100 per barrel, we were pretty much convinced about it, and so that was the first thing.

But the downside is that oil prices will definitely come down because they move in a cycle, but the rally in oil prices is actually ahead. And I don't see oil prices coming down quickly. It could go up further. $120 per barrel or even higher than that looks possible at this point in time. It may not stay there for a significantly longer period of time, but it will create quite a lot of disruptions in the market in terms of the macro fundamentals.So, at this point in time, we did not want to be so pessimistic by predicting that oil prices will go to that level because that's not the intention.

But the point is that there is still a significant rally left in oil prices as of now before it starts coming down.Q: No, you're saying you think that there perhaps is more on the upside.A: Yes, there's more on the upside.Q: Put a number to it.A: $120 per barrel looks imminently in sight. And after $120 per barrel, for the Indian crude basket, as you are saying, we are already paying $10-$15 more, so $110 per barrel is a price beyond which it looks difficult to sustain.

Beyond $100 per barrel, but if you put a mark at $110 per barrel, already from that point of view, it will create problems for our overall import bill.Q: So $120 per barrel in the near term is your prediction, right? A: Yes.Q: But you began by saying that it doesn't stay there for very long.A: No, it will not stay there because that's the other side of the story. As you have seen, the US yields have actually been breaking all records.

Even after the US Treasury Secretary announced the grand buyback, that's not going to pull down the yields because the US has a fundamental problem with the fiscal deficit of $40 trillion, which is growing. And if we are going to try and buy back, and inflation numbers in the US last month were a little higher than expected, and the Fed has also been talking tough. So, you can't have all these three things, and all these three things are not congruous; they are incongruous.

You can't have a bond buyback, you can't have a rate hike by the Fed if it happens after all, and you can't have Treasury yields breaking records.So, all this is going to put pressure on the Indian markets. The rupee is already feeling it, and I will not be surprised if the domestic yield also follows suit. It is close to the 7% mark now, and if the yields in the US market continue to move like this, the US 10-year is now moving closer to 5%, which is going to be a record.

So, if it moves beyond this number, there will be repercussions for the emerging economies, and India cannot be an isolated island amid such macroeconomic upheavals.Q: Give us the number, your prediction for the 10-year here in India and the dollar-rupee also.A: The dollar-rupee is already weakening, so there could be some further dollar-rupee weakening from here. That's the reason why we have written in that note also.

If you see that after the FCNR window closes, the most important job of the central bank is to look for effective exchange rate management because if you allow the rupee to move to higher levels, I think that creates a self-fulfilling prophecy. The rupee should go higher. It's already crossed 96, and for the 10-year yields, I'll not be surprised if they move beyond that psychological 7% mark sooner rather than later if this trend in the US yields continues like this.Q: That $120 price is not very far.

It's $12 more. But this is based on your team's assessment of inventory and all those things, right? It's not a geopolitical call.A: It's basically, if you ask me, we are not oil analysts, but it's mostly a geopolitical call, along with the inventories and other things associated with it. There is a fundamental breakdown in the oil market, and in terms of the continued skirmishes that are happening, there is, of course, some amount of demand-supply imbalance over here, but mostly it's a geopolitical call because, if you remember, at the beginning of the year, in February, before the war started, the IEA had predicted that the oil prices could move towards $60 per barrel.

Things were quite okay at that point in time before oil prices started to go up because of the war. It is more of a geopolitical conflict. And if you look at the market, higher prices look imminent at this point in time.Q: We had all this FCNR inflow come in, right? And that week when we got that number, which was I think last week only, right? When we got the final number, etc.? There was chatter that the RBI intervened heavily and sold a lot of dollars.

What's going to be the strategy, you think? Because intervention works better when the dollar-rupee is -- you get more bang for the buck when oil prices are lower. But when things are against you, it may seem like a bit of wasting precious dollars as well. What's your sense? A: No - I'm sorry to use the term, but that's a misnomer—that we are wasting our precious dollars. At $750 billion, if we still think that we can't use our dollars to intervene in the foreign exchange market, I don't think that is a correct interpretation.

During 1997-98, the RBI had $29 billion in foreign exchange reserves, but it intervened effectively in the market.The central bank is the best judge of the market. The only thing the central bank needs—and if you look at the exchange-rate policies of all emerging economies, and even developed countries—is basically to lean against the wind. That means you are trying to stop the depreciation trend.So, from that perspective, a strong signal to the market could halt the depreciation.

It may not stop it, but it could actually put a halt to it. Otherwise, if you allow the rupee to run away from these levels, it could quickly turn into the levels we were expecting earlier. I think, if you remember, it had moved closer to 97 before we had a pullback.And given that the situation is significantly volatile right now, I know it's difficult for any central banker to be in the market and manage multiple objectives at the same point in time: the interest rate, exchange rate, inflation numbers, oil prices, and also this liquidity overhang.But my view is that at some point in time, there has to be a strong signal to the market in terms of forceful intervention so that the rupee, even if it depreciates, doesn't go significantly beyond the current levels.For the full interview, watch the accompanying videoCatch all the latest updates from the stock market here