Mumbai: Global crude oil prices have perturbed even the best of policymakers, as oil has been a slippery commodity to forecast. For a net importer like India, it skews the pitch for domestic inflation even more.
For the Reserve Bank of India’s (RBI’s) six-member monetary policy committee (MPC), oil prices and their impact was a key factor that pushed two members to vote against a cut in the policy repo rate. RBI deputy governor Viral Acharya and nominee member Chetan Ghate voted against an RBI rate cut on the basis of their concerns that rising crude oil prices have the ability to push up everything from headline inflation to inflation expectations.
Ghate observed that core inflation, which remains around worrying levels of 5%, will be buttressed by rising crude oil prices, and this makes inflation management challenging. Acharya added that past experience with volatile oil prices and the impact on domestic inflation suggests that extreme caution should be taken.
Even members who voted for a rate cut, including governor Shaktikanta Das, agreed that oil prices need monitoring. On the other hand, Ravindra Dholakia believed that the impact from rising oil prices should not worry, unless global prices reach beyond $80-85 per barrel on a durable basis. Brent crude has climbed another 3.6% to $72 per barrel since the policy was announced on 4 April, and prices have surged 36% so far in 2019.
Besides oil, food prices, too, were a key concern with members having differing views. The dissenting members advised a more cautious approach to food prices even though food remains in deflation. The combination of rising food prices and oil could result in inflationary expectations rising again, they said.
Members who voted for an RBI rate cut argued that food prices have behaved along expected lines and are likely to remain benign. Dholakia believed that even volatile components, such as vegetables, in food prices are likely to behave and a spike would at best be temporary. Das concurred, although he agreed that volatile food prices pose a risk to inflation forecast.
The RBI MPC members showed differences in their assessment of where commodity prices are headed and to what extent these are worrisome.
That said, there was a consensus on growth among members and future rate cuts are likely to depend on how members perceive the growth slowdown.