Japan crisis may push up oil prices: RBI

The Reserve Bank of India (RBI) said the earthquake and tsunami in Japan, followed by the meltdown at a nuclear plant, may have implications for global oil prices.

“It is as yet too early to assess the macroeconomic consequences of the natural disaster in Japan. As normalcy is restored, expenditure on reconstruction may provide a boost to the economy. However, substitution of thermal for nuclear energy in Japan may exert further pressure on petroleum prices,” RBI said in its mid-quarterly credit policy review on Thursday.

This, in turn, may further push up India’s inflation rate, which is already above the central bank’s comfort zone. RBI said the risks on inflation are clearly on the upside because of high fuel prices and persistent demand-side pressures.

“Expectations of moderation in inflation in the first half of financial year 2011-12 that the central bank had alluded to in its last policy statement in January are conspicuous by their absence,” said Abheek Barua, chief economist, HDFC Bank. This, along with the upward revision of the March estimate, means not only is the rate rise cycle in financial year 2011-12 now likely to be extended more than initially anticipated but is also likely to be far more front-loaded, he added.

Inflation is not expected to come down for quite some time as RBI has raised its inflation projection for March 2011 to 8 per cent from 7 per cent as stated in the third-quarter monetary policy review in January.

“Further upside risks have stemmed from high international crude prices, their impact on freely priced petroleum products, the increase in administered coal prices and the pick-up in non-food manufactured product prices,” said RBI in the release.

Food inflation has given some respite since January but prices of protein sources such as milk, eggs, meat and fish continue to be high, reflecting structural demand-supply imbalances.

RBI expects the measures announced by the government in the Budget for 2011-12 will improve the agricultural supply response in the medium term. While on steps announced to ease demand-side pressures, RBI said, “This will materialise only if commitments to contain subsidies are adhered to.”

On the other hand, RBI said the underlying inflationary pressures have accentuated with emerging risks to growth. “Continuing uncertainty about energy and commodity prices may vitiate the investment climate, posing a threat to the current growth trajectory,” said RBI.

“RBI has unambiguously guided that given the current growth-inflation dynamics, the central bank is likely to persist with the current anti-inflationary stance,” said Siddhartha Sanyal, chief economist for India, Barclays Capital.

RBI also said the weak performance of capital goods in the index of industrial production suggests the investment momentum may be slowing down. The RBI raised both policy rates by 25 basis points as it aimed at containing demand-side inflationary pressures and managing inflationary expectations.

India’s inflation indicator, the Wholesale Price Index (WPI), moderated marginally in January before rising again in February on the back of a sharp increase in non-food manufactured products. WPI in February was at 8.31 per cent, higher than 8.23 per cent in January. WPI was at 8.43 per cent in December 2010. Non-food manufactured products inflation rose sharply from 4.8 per cent in January to 6.1 per cent in February.