If crude oil prices continue to rise, India will be impacted by not only higher inflation and trade deficit, but by on subsidies, and any move towards easing monetary policy will have to take this into consideration, rating agency Care said today.
"The easing of monetary policy will have to be reviewed in case [oil] prices start going up. Our country in particular will be affected by just not higher inflation and trade deficit, but also on subsidies which seems to be a fairly sticky account in the Government's budget," a report by the rating agency said.
Noting that the country consumed about 3.6 million barrels per day in Q4 of last fiscal, the report said it is increasing every year.
Higher price of crude has dual impacts. First it increases the trade deficit which has foreign exchange rate implications, which by itself will pressurise the price level. Second, on account of the high oil subsidy, there will be pressure on the Government to either raise the subsidy level or increase market prices of controlled products, it said.
"If the government prefers to up subsidy, fiscal deficit is bound to expand, and if it opts for the latter [retail rice hike], an inflationary impact is unavoidable."
After 13 successive rate hikes beginning March, 2010 through October, 2011 to fight inflation, the Reserve Bank has hinted at a pause to the rate hike cycle and on January 24, it left all the key rates unchanged and cut the cash reserve requirements of bank to 5.5% from 6%.
Inflation, after hovering at near double-digit mark for nearly 20 months, eased to 6.55 in January and is likely to stay below 7% for the fiscal end in March.
