RBI wants inflation elephant in the forest. Can pricier oil bring it back?

After witnessing sustained moderation, cost push pressures faced by firms, the RBI said, are showing upward bias

The Reserve Bank of India (RBI) on Friday maintained a status quo on rates for the seventh consecutive time and said it remains watchful of the developing geopolitical situation that may trigger a further rise in crude oil prices, thereby impacting the inflation trajectory in the country.

After sustained moderation, cost-push pressures faced by firms are showing upward bias, said the RBI. Geopolitical tensions and volatility in financial markets also pose risks to the inflation outlook, it said.

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“Two years ago, around this time, when CPI (consumer price index) inflation had peaked at 7.8 per cent in April 2022, the elep­hant in the room was inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis,” said RBI Governor Shaktikanta Das. The RBI lowered its CPI inflation forecast for the first, second, and the fourth quarters of FY25. For FY25, the inflation forecast remains unchanged at 4.5 per cent.

Rising oil prices

In calendar year 2024 (CY24), crude oil (Brent) prices have increased by more than 18 per cent to hit the $91 a barrel mark, fuelled by geopolitical tensions and tight supply. In the last one month, Brent crude oil prices have surged nearly 10 per cent, with nearly 3 per cent of this gain coming in the last three days.

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“Oil prices have begun to appreciate since the International Energy Agency (IEA) on March 14 increased its demand forecast and reduced its supply forecast. The latest data on China oil demand also shows a further increase reflecting the pattern prevailing last year. The other issue that could trigger a further rise in the oil price is clearly rising geopolitical tensions,” said Christopher Wood, global head of equity strategy at Jefferies. Analysts at Rabobank International expect Brent crude oil prices to range between $71 and $93 a barrel in 2024. In the short-to-medium term, oil prices, according to G Chokkalingam, founder and head of research at Equinomics Research, can hit $100 a barrel amid firm global demand.

“Globally, most frontline economies, including the US, Japan and India are doing well. I expect the demand for oil to remain firm. If the supply is constrained coupled with geopolitical concerns, Brent crude oil prices can rise to triple digits going ahead,” he said.

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According to estimates, a $10 per barrel rise in oil prices leads to a 40 to 60 basis point (bps) increase in CPI in India, which imports nearly 80 per cent of its annual crude oil need. “The wider Mideast tensions stemming from the Gaza war are probably the highest in six months. Crude is reflecting that Mideast conflagration fear premium. But does the heightened rhetoric, especially between Israel and Iran, subside or does it lead to more open warfare – that will decide whether it’s a leg up or down for crude from here,” said Vandana Hari, founder, Vanda Insights.

While low core inflation gives India comfort, Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, believes uncer­tainty on food inflation remains a worry. “The higher US yields, higher oil prices and other commodities along with possible delay in Fed’s rate easing cycle will keep the MPC wary. We do not see much scope for any rate easing until Q2-FY25. Earliest possibility of rate easing can emerge in Q3-FY25,” she said.

With an unchanged inflation projection for FY25 at 4.5 per cent, growth conditions improving and the US Fed also pushing out its rate cut cycle, Indranil Pan, chief economist at YES Bank expects the RBI to be in a position to cut rates either in the August policy or later.