Crude prices risk can be treated as supply shock: RBI deputy governor Patra

The recent surge in global crude oil prices due to the war in Ukraine is an overwhelming risk but seen as a supply shock from a monetary policy point of view, Reserve Bank of India’s Deputy Governor Michael Patra said on Friday.

The Russia-Ukraine conflict has pushed global crude oil prices over $100/bbl, for the first time since 2014. The surging prices will have an impact on domestic inflation as the country imports more than 80 per cent of its crude oil requirement. Patra said the impact on growth and inflation projections of RBI will be reviewed during the next monetary policy committee (MPC) meeting scheduled on April 6-8. The RBI has projected the economic growth rate for 2022-23 at 7.8 per cent, while inflation for the next financial year is seen at 4.5 per cent, and 4.9 per cent in the April-June period.

“The breakout of hostilities in Ukraine and its fallout may necessitate a review. The choice of a bi-monthly meeting cycle for the MPC ensures that this will be done, with all available data arrivals and analytical updates, in the forthcoming meeting in April,” Patra said.

Interestingly, Patra said adjustments in excise duty on petrol and diesel can delay its pass through to retail prices.

“…international crude prices present an overwhelming risk, though headroom to adjust excise duties can delay the passthrough to pump prices,” he said in a speech “Taper 2022: Touchdown in Turbulence.”

Patra said prospects for the easing of food inflation remain bright with record production and buffer stocks and strong supply-side interventions and increase in domestic production can check inflation-sensitive pulses and edible oil prices, though spillovers from the geopolitical situation cannot be ruled out.

“While the fallout of the geopolitical situation is being assessed and will be factored into our projections, it is reasonable to treat it as a supply shock at this stage in the setting of monetary policy,” he said.

Since the start of the pandemic two years ago, the central bank has been growth supportive as it promised to maintain the accommodative stance of the monetary policy and even overlooked spikes in inflation in the context of it being supply driven.

“Global spillovers are impacting core inflation on an ongoing basis and keeping it elevated, but the absence of second round effects on wages and rentals, and low pricing power among corporates and excise duty cuts on petroleum products have tempered these upside pressures,” he said.

Although India is relatively shielded from the direct fallout of the geopolitical tensions, given direct trade and finance exposures in the context of the ongoing conflict are limited, the contagion may, however, impact India through a broader fallout on emerging market economies (EMEs) as an asset class.

“For India, direct trade and finance exposures in the context of the ongoing conflict are limited…The main transmission channel is likely to be global liquidity conditions, which are tightening. If worry were to give way to panic, liquidity, especially US dollar funding, could dry up and markets could malfunction,” Patra said.

He said with Brent crude prices above $100 a barrel, there could be macroeconomic headwinds for the country. Also, reassessment of geopolitical risk by markets and investors, which may inflate country risk premiums, could increase the cost of funding for EMEs, and reduce investment volumes.

He said agriculture and allied activities, exports, and the plans for public capital expenditure are bright spots that illuminate the outlook with multiplier effects. The recovery of private consumption and investment is still work in progress. Contact-intensive services remain below pre-pandemic levels. “Consequently, the policy stance has to be carefully calibrated. Monet­ary policy remains in accommodative mode and continues to engender financial conditions that are supportive of growth. Even though fiscal consolidation is underway, there is still some stimulus in the economy that will last through 2022-23, as estimates of the fiscal impulse suggest,” Patra added.

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