The current geopolitical tensions and rising oil prices could hurt India’s economic growth and push inflation above the central bank’s target ceiling of 6%, according to Oxford Economics Ltd.
“It’s looking quite worrisome,” said Priyanka Kishore, head of India and Southeast Asia at Oxford Economics, who estimates every $10 per barrel increase in oil shaves off about 0.2 percentage points from full-year growth and adds about 0.4 percentage points to inflation.
“RBI needs to ensure they can pull back inflation toward 4%,” she said in an interview to Bloomberg Television on Monday. “That’s important for stability.”
India’s inflation breached the upper limit of central bank’s 2%-6% target range in January, driven by rising costs of food and fuel. Sanctions on Russia after it attacked Ukraine last week are further driving up oil prices, with Brent crude soaring above $105 a barrel on Monday.
“This means that inflation will stay above RBI’s target range this year,” Kishore said. “Even as growth is slowing, pressure on the RBI will grow to address inflation risks even if they are coming from supply shocks.”
While neither Russia nor Ukraine is a major trading partner for India, New Delhi faces risks from rising commodity prices given it’s a net importer of crude oil.
“Behind the aggregate picture there are some shocks that could come through and that would once again feed into inflation,” Kishore said. She sees RBI sticking to “not raising rates in next policy but the language will be watched quite closely” on how the tightening will proceed.
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