Russia-Ukraine war poses upside risk to inflation: Finance ministry

Monthly report says second advance GDP estimate reaffirms full recovery

The finance ministry said on Tuesday that high energy and commodity prices due to the Russian invasion of Ukraine may provide an upside risk to inflation and continued vigil is required.
 

“Going forward, elevated energy and commodity prices may act as an upside risk to the inflation outlook in the near-medium term. Given the inherently unsustainable nature of high prices, international commodity prices are expected to level off early with an increase in supplies outside the crisis zone,” the department of economic affairs said in its latest monthly economic report for February.
 

“For the fiscal year 2022-23, RBI (Reserve Bank of India) has projected CPI inflation at 4.5 per cent with risks broadly balanced. However, recent increase in prices of food and energy commodities and metals warrants continued vigil on the inflation front,” it said.
 

The report stated that the second advance gross domestic product (GDP) estimate, which expects real GDP to grow by 8.9 per cent in the current year, has reaffirmed full recovery. This is because the size of the economy is now expected to go past pre-pandemic levels of 2019-20 with a negligible dent from Omicron.
 

“The geopolitical tensions — involving Russia and Ukraine — triggered a massive turbulence in the global economy. Within days, international prices of crude oil and other commodities shot up, escalating the cost of India’s import basket. Its impact on India’s activity level in March, if any, can be assessed only a month later, when high frequency data becomes available,” it said.

The report added that the geo-political crisis is still evolving and these are early days to make a plausible forecast of its impact on India’s economy in the year ahead.
 

It said that India has braced well to meet the impact of rising commodity prices as foreign exchange reserves continue to be at a record high. They are large enough to finance more than 12 months of imports. Also, foreign investors have largely stayed invested in the economy.
 

“The impact on growth, inflation, current account and fiscal deficits will depend on the persistence of commodity prices at elevated levels. As the base effect fades, WPI inflation is expected to moderate in the coming months,” it said.