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Climbing oil prices put India's benign inflation outlook at risk

Data due Friday will probably show headline inflation quickened to 2.8 per cent last month from 2.5 per cent in February

Anirban Nag & Vrishti Beniwal | Bloomberg 

Representative Image
Representative Image

A rebound in oil prices poses a risk to India’s benign expectations that last week allowed the central bank to deliver its second rate cut of 2019.

With at a five-month high, many investors are turning less confident about the Reserve Bank of India’s pace of monetary easing, though a slowdown in economic growth and subdued still support an easing bias.

The low headline print gave Governor and the rate-setting panel the space to cut rates by 25 basis points each in February and April to support the economy. Some economists see room for one more reduction provided food and fuel costs don’t spike.

Data due Friday will probably show headline quickened to 2.8 percent last month from 2.5 percent in February.

“The recent rise in prices, if sustained,” could pose a challenge to both economic growth and inflation outlook, said Dharmakirti Joshi, chief economist with Crisil Ltd. in Mumbai.

Forecast for Brent, the benchmark for half the world’s oil, has been lifted on the back of production cuts, and the RBI sees prices being pushed up further should the U.S.-China trade tensions be resolved swiftly. The two sides are nearing a trade deal, with talks aimed at clinching one within the next month continuing.

A recent study by the central bank showed a $10 rise from $65 a barrel will lead to a 49 basis points increase in headline inflation, while a similar increase from $55 a barrel would give around a 58 basis-point boost to headline inflation.

Rupee Offset

Oil’s charge higher has also offset any gains from a rising currency on imported inflation. The rupee climbed 2.3 percent against the dollar in March, making it the best performer in Asia. The currency is up more than 7 percent from its October low, leading to a view among economists like HSBC Holdings Plc’s Chief India Economist Pranjul Bhandari that some of the impact from the rising currency could help ease inflation.

Still, others see the rupee’s role being countered by oil.

“It appears on balance that the recent hardening of oil prices would have negated the impact of rupee appreciation to a large extent,” said Gaurav Kapur, chief economist at IndusInd Bank Ltd. in Mumbai.

First Published: Fri, April 12 2019. 07:33 IST
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