The impact of the war in Ukraine on global supply chains could force India's central bank to raise its inflation forecast, but leave little room for tightening monetary policy amid a deteriorating global growth outlook, according to economists.
The rise in food and crude oil prices is bound to add to headline inflation, which has already crossed the Reserve Bank of India's upper tolerance limit of 2%-6% target range. While the RBI has attributed the spike to supply side shocks, higher prices will still eat away at the disposable income of consumers, the backbone of the economy which is yet to fully start spending post the pandemic.
"It's a nightmare for policymakers -- the risk of sustained inflation, with a very uneven and unsatisfactory growth," said Ananth Narayan, senior Indian analyst at the Observatory Group, an economic and political advisory firm.
Amid rising crude oil prices above $100 a barrel and geopolitical uncertainty, Narayan feels retail inflation could average 6% in the next financial year starting April - instead of the 4.5% forecast by the RBI. India, which is dependent on imports to meet around 85% of its oil needs, expects pump prices to rise after the elections to key states end this month.
"If the government decides to pass on even half of the effect, the inflation numbers based on oil prices could be higher," said Soumya Kanti Ghosh, an economist at State Bank of India.
According to estimates by Saugata Bhattacharya, chief economist, Axis Bank Ltd., a 10% increase in retail prices of gasoline, diesel and liquefied petroleum gas could result in an increase of 50 to 55 basis points in consumer prices over the course of a year.
Still, the central bank may shy away from raising interest rates as it reconciles its roles of fighting inflation, supporting growth, and managing the government's issuance of debt. Russia's invasion of Ukraine is a risk to India's budget math, as it could sabotage the government's plan to raise money from asset sales, while possibly leaving some revenue to save consumers from the burden of expensive crude. gives.
Any cut in excise duty to offset the impact on retail fuel prices could undermine the government's fiscal deficit target, which was worked out in the range of $70-$75 per barrel depending on oil. Those calculations are now out the window with Brent touching $139 a barrel on Monday. Prime Minister Narendra Modi's administration is also reconsidering the timing of its proposed share sale in Life Insurance Corp., which could slash revenues and widen the budget gap that is already the largest in the world.
While India has refused to borrow more this fiscal to bridge the gap, its loan plan for the year beginning April 1 is on record, necessitating a cheaper interest rate. .
Soumyajit Niyogi, Associate Director, India Ratings and Research said, “The sharp rise in energy prices and the impact of other commodity prices will pose further challenges to the growth-inflation dynamics. "While global central banks may still go for monetary tightening, domestically RBI is expected to continue with a wait-and-watch policy."
Greater risk
Expensive crude could widen the country's current account deficit, the biggest trade measure, and weigh on the local currency, which had already hit a record low on Monday.
Gaurav Kapur, Chief Economist, IndusInd Bank Ltd, said, "Continuing depreciation of rupee due to widening trade deficit and Fed tightening, could be another source of imported inflation."
According to Anubhuti Sahay, chief economist, Mumbai-based South Asia, Standard Chartered plc, the price shock of crude could reduce economic growth in India by 60 basis points.