Oil has sprung back above $100 per barrel amid sharp volatility that is likely to make the task of policymakers trickier. High oil prices are threatening to let inflationary pressures loose, but growth prospects have also come under a cloud.
This puts the Reserve Bank of India’s monetary policy committee (MPC) in a spot, as the minutes of its most recent meeting suggest.
The MPC observed that supply disruptions caused by the West Asia war have complicated the policy choices for central banks, as prices are looking up and global growth down. While India’s economy is better insulated from this external shock, thanks to its domestic drivers of GDP, it too looks set to take a hit, especially if the war lasts long.
From a Goldilocks scenario of high growth and low inflation, we risk an inversion of that comfort. A short-lived price spike could have been ignored, but an oil squeeze has already squashed hopes of minimal damage.
Should hydrocarbon supplies stay disrupted, price instability may begin to look like a bigger threat than a slowdown, but the MPC would need data to check which trends are being warped worse by the war before acting. Some economic pain, however, is unavoidable.