If crude prices stay high, just a matter of time before govt hikes petrol, diesel costs: RBI Governor Sanjay Malhotra
“We have this framework of flexible inflation targeting, but in such times it’s not sufficient,” the RBI Governor said.
India may need to increase retail fuel prices if the conflict in the Middle East drags on, Reserve Bank of India Governor Sanjay Malhotra said.
His remarks came after Prime Minister Narendra Modi urged voluntary austerity, including cutting down on petrol and diesel use and putting off gold purchases, to preserve foreign exchange reserves. The duty on gold was more than doubled and more measures to curb demand for imported goods are likely, Bloomberg News reported earlier.
“If this is to continue for longer period of time, it is just a matter of time before the government will pass on some of the price increases,” Malhotra said at a conference hosted by the Swiss National Bank and the International Monetary Fund in Switzerland on Tuesday. Excise duties had been cut while state-run fuel retailers were absorbing the increase in crude prices as the conflict continues, he added.
Quick answers to key questions
The Indian government may need to increase retail fuel prices if the conflict in the Middle East continues, leading to sustained high crude prices. Fuel retailers and tax cuts have so far absorbed these increases, but this may not be sustainable long-term.
The conflict in the Middle East disrupts supply chains, leading to higher commodity and freight costs, which makes food and fuel more expensive. This contributes to rising inflation in India, potentially impacting the RBI's inflation targets.
Prime Minister Narendra Modi urged voluntary austerity, including reducing petrol and diesel use and gold purchases. The government also doubled the duty on gold to curb demand and alleviate pressure on the rupee.
While rising inflation poses a risk, analysts believe an immediate interest rate hike by the RBI is unlikely. The central bank is expected to maintain a cautious stance and monitor incoming data, especially inflation trends and crude oil prices.
Elevated oil prices, driven by the Middle East conflict, put pressure on India's currency. The rupee has depreciated against the US dollar, partly due to the increased cost of imports like crude oil.
India’s inflation edged up to 3.48% in April from 3.40% in March, coming in lower than expected as the government absorbed higher crude costs. However, risks remain as rising energy prices from the Middle East conflict weigh on the outlook.
Supply-chain disruptions in the region are beginning to hit India. “We have this framework of flexible inflation targeting, but in such times it’s not sufficient,” he said, adding that fiscal coordination becomes critical “if the supply shock is as big as it is.”
The RBI has forecast growth of 6.9% this financial year, with inflation averaging 4.6%. However, economists expect growth to slow further and inflation to rise due to the conflict. The RBI left its key policy repurchase rate unchanged at 5.25% in April.
“We are being more and more data dependent. We are taking it more meeting by meeting,” said the RBI governor. The RBI is being flexible in its approach and is ready to look through the shock if it’s transitory, “but if it is entrenched, we need to take action,” Malhotra said. The central bank’s next monetary policy meeting is scheduled for June 5.
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