MUMBAI: Economists do not see the surging crude prices having a major impact on inflation nor warranting any monetary policy measures by the central bank soon.
The comments came on a day when the Centre released the first full month retail inflation based on the new base year for February which printed in at an expected 3.2%, up from 2.75% in January. But the February reading has nothing to do with the crude surge as the Iran war began only on February 27.
Inflation continued to trend up in February, rising to 3.2% on-year from 2.75% in January, hitting an 11-month high and the fourth successive months of upward move. The pickup was largely driven by base effects while price pressures eased in sequential terms, said economists.
“Domestic fuel prices are cushioned by oil marketing companies’ high margins and the country’s electricity mix, which relies largely on coal and renewables. We don't expect the RBI to hike the policy rate soon as we see only limited impact of the surging crude prices on inflation,” Alexandra Hermann, lead economist at Oxford Economics, said in a note Thursday.
She further said the ongoing energy price surge is happening against a much more benign inflation backdrop than in 2022 (when the Ukraine war began leading to a massive spike in oil prices). “At that time, elevated food and core price pressures had already pushed inflation closer to the Reserve Bank’s 6% upper limit, leaving the economy more vulnerable to additional price shocks than it is now,” she said.
But she was quick to warn that “in a more severe scenario, if global oil prices average around $140 a barrel for two months (as it did during the initial months of the Ukraine war), monetary policy settings may tighten by June.”
Senior economist at DBS Bank Radhika Rao also does not see any chance of an immediate increase in retail prices of petroleum products.
“The within-target inflation numbers (3.2%) are unlikely to be an important market-mover for policymakers, with focus instead on improving policy transmission and maintaining financial market stability, in midst of geopolitical risks” she said, adding, "Under the new series, core inflation is trending at a more benign level than the old series, due to a combination of subdued run-rates in housing, health and personal care categories.”
“The ongoing spike in crude prices (trending around $100 a barrel now after nearing $120 earlier in the week) raises some upside risks to inflation in the coming months. However, these pressures are likely to be transitory. If anything, the RBI may respond with a more accommodative liquidity stance to smoothen financial market volatility arising from geopolitical uncertainties,” said Sujan Hajra, chief economist at Anand Rathi.
But he quickly added that the latest inflation print may nevertheless have mildly negative near-term implications for the debt, equity and foreign exchange markets.
Aditi Nayar, chief economist at Icra Ratings, attributed the spike in the headline CPI numbers to 3.2% was almost entirely led by the food and beverages segment, which accounted for as much as 44 bps of the 47 bps rise in the headline print between these months. Core (CPI excluding F&B and electricity, gas & other fuels) remained unchanged at 3.4% between these months.
She expects the hike in LPG prices earlier this week to exert upward pressure on inflation prints for electricity, gas & other fuels, and restaurant & accommodation divisions in this month. These, along with continued hardening in average prices of precious metals such as gold would push up the headline inflation to 3.3-3.5% in March.
Devendra Kumar Pant, chief economist at India Ratings, also does not see the retail prices of petrol and diesel going up soon saying “despite hardening of crude and petroleum product prices, retail prices of petrol and diesel have remained same and are expected to remain same in near-term.”
“Factoring in continuing increase in food products price/ inflation in March, LPG price hike and evolving currency movement, we expect March retail inflation to increase to 3.7% forcing the RBI to be watchful and expect a long pause on policy rates,” Pant said.