Crude oil prices have spiked overnight and are currently trading at $97 per barrel, owing to the rising geopolitical tensions fuelled by Russia and Ukraine. In a recent turn of events, Vladimir Putin has recognised two breakaway regions of Ukraine- Donetsk and Lugansk as independent, drawing major flak from the NATO and the US alike. However, that’s not all that’s affecting crude prices. The US is also working towards removing sanctions on Iran so that oil from that region can enter into the market.

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To understand the geopolitical premium on crude oil and where it will head in the near future, CNBC-TV18’s Latha Venkatesh spoke to Peter McGuire, CEO, XM Australia, and Samiran Chakraborty, Chief Economist-India, Citi.

McGuire believes any shortfall could impact crude, which is why the Iran deal is being looked at. He highlighted that what is unknown at this point in time is how long the Russia-Ukraine situation will last.

"In case of Iran, any shortfalls and if this affects crude as far as the supply side is concerned, coming out of Russia, then naturally there'll be a further shortfall which could push prices a lot higher," he said.

"We have to work through this whole process of Russia-Ukraine crisis and that could be days, weeks, or it could even be longer. So that's the unknown. We have got Brent crude sitting at USD 97 per barrel, we are only a whisper away from USD 100 per barrel and WTI at USD 94 per barrel. Obviously we're going to crack the USD 100 per barrel and maybe you might even go a little bit further than that," he added.

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Chakraborty, on the other hand, believes the impact of higher oil price could get neutralised by a seasonally strong quarter.

"There is an aspect that this is seasonally the strongest quarter for the current account. So, whatever is the impact of the higher oil prices, to some extent, that's getting neutralized by the seasonality," he mentioned.

If crude price continues to go north, there could be some serious ramifications for India, as the Reserve bank of India has assumed low crude price and food prices in its inflation forecast. Therefore, Chakraborty believes there could be some upside to inflation if the RBI assumptions fall short of expectations. He believes inflation could be in the broad range of 4.5 to 5.8 percent. He, also cautioned that inflation in the range of 5-5.4 percent could be tricky. This can also lead to the balance of payments (BoP) situation worsening in the next quarter, especially since it is already a seasonally weak one.

He said, "RBI has factored in almost all the good news into their 4.5 percent inflation forecast, which essentially is low oil prices, low food prices, and a significant negative output gap, keeping the core inflation also relatively muted. Now, each one of these factors, if they don't work, their assumptions don't work, then you could see some upside coming from it."

"Inflation could be 5.3. So in our view, the range is from 4.5 percent where all the good news is there to 5.8 percent where all the bad news is there. And depending upon where we end up within this broad range of 4.5 to 5.8, the RBI’s policy reaction functions could be very different. The 5 to 5.4 range is a slightly tricky range," he explained.

"The balance of payments (BoP) situation is likely to worsen in the next quarter given that seasonally it is the weakest quarter of the of the year," he added.

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Chakraborty believes there could be an interest rate hike in the second half of FY23. He also believes that RBI’s language and stance could change prior to rate hikes.

"We believe that in the second half of the fiscal year (FY23), we could see RBI hiking rates. But before that, we will get enough indication from the RBI both in terms of change of language and change of stance to assess whether this is moving or not," he said.

Watch the video for the full interview.

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(Edited by : Dipikka Ghosh)