The impact of the surge in crude oil prices following the West Asia war needs to be monitored, even though headline inflation has remained within the tolerance band, as it poses a challenge for the external sector, the Reserve Bank of India’s (RBI’s) monthly State of the Economy report said.
The report said India has entered this phase from a position of macroeconomic strength, as domestic demand continues to be the key driver of growth. At the same time, the near-term outlook remains somewhat clouded by supply-side pressures.
It also noted that domestic economic activity in April showed resilience despite a deceleration in some indicators.
“Although headline inflation remains firmly within the tolerance band, the pass through to domestic prices needs to be monitored,” the report, which is authored by RBI staffers, with the guidance of Deputy Governor Poonam Gupta, said. The views of the report are those of the authors and do not represent the RBI’s views.
Brent crude prices, which declined to $100.71 per barrel on Friday, are still up 36.3 per cent from late February, when the conflict began.
“Financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook,” the report said, noting that yields on treasury bills and dated government securities edged up in May.
The conflict in West Asia led to a significant increase in global oil and gas prices. The price of the Indian basket of crude oil remained elevated, resulting in large under-recoveries for oil-marketing companies (OMCs). Consequently, OMCs increased the retail prices of key petroleum products in two rounds — first on May 15 and again on May 19.
Reflecting price pressures arising from the West Asia conflict, Wholesale Price Index (WPI) inflation rose to 8.3 per cent in April from 3.9 per cent in March, touching a 42-month high. The sharp increase in WPI inflation in April was largely driven by the fuel and power group, although other groups also witnessed a rise.
Consumer Price Index (CPI) headline inflation edged up marginally to 3.5 per cent year-on-year in April from 3.4 per cent in March, primarily due to higher food inflation.
The report also flagged that high temperatures and unseasonal rains could affect farm output.
“A higher probability of above-normal minimum temperatures and unseasonal rains in some parts of the country could pose risks to the harvesting of remaining rabi crops,” it said, adding that current public foodgrain stocks remain well above the buffer norms, ensuring domestic food security.
On the external sector, the report said the merchandise trade deficit widened in April compared with March, with the import bill rising mainly due to crude oil and gold imports.
