India’s CPI View Assumes Oil at $80 With Risks Seen Manageable

(Bloomberg) -- The Indian central bank’s subdued inflation forecast for next financial year assumes oil at $80 a barrel, and risks to that outlook from Russia’s war-induced supply disruptions are best handled by the government, according to a monetary policy maker.

“If international oil sustains above this for a substantial period and there is pass-through to domestic oil prices, projected inflation would rise,” Ashima Goyal, an external member on the Reserve Bank of India’s six-member Monetary Policy Committee, said in an email interview. “Inflation targeting theory tells us that tightening monetary policy under supply shocks, or if there are unemployed resources, imposes a large output sacrifice,” she said.

Indian fuel retailers, who had frozen gasoline and diesel rates for over three months coinciding with elections ending Thursday, are expected to raise pump prices to cover rising costs of higher crude oil. That’s a risk for consumer price inflation and could upend the outlook for the RBI, which in February saw price-growth easing to 4.5% in the year beginning April from an estimated 5.3% this year.

The government should step in by lowering the cost of fuel by cutting some taxes, Goyal said, pointing to the revenue windfall from higher tax rates on retail fuels when they were cheap during the pandemic.

If prices continue to remain high, though, “some burden sharing would have to be evolved,” she said.

But signs emerged that oil may come off the boil after a top aide to Ukraine’s president said the country is open to discussing Russia’s demand for neutrality. Brent crude is now hovering around $110 a barrel, down from about $128 a barrel on Tuesday. 

Goyal, an economics professor at the Mumbai-based Indira Gandhi Institute for Development Research, said she preferred to “wait and watch” before more clarity on the oil situation emerges by the next policy review between April 6 and 8. 

Here’s more from the interview with Goyal:

• “Inflation has stayed within the tolerance band in very difficult conditions and projections were for it to come down toward the target. “How is this being behind the curve?” she said, referring to concerns expressed by her MPC colleague Jayanth Rama Varma that the authority risks falling behind the curve if it keeps rates loose for too long
• “If CPI headline is expected to persistently exceed the tolerance band, the MPC will act,” Goyal said. “The MPC can act quickly if needed from an accommodative stance also. But the current crisis needs to be watched for some time before reacting”
• She does “not expect extraordinary accommodations although global central banks may moderate the pace of exit depending on how their economies are affected,” citing research that exit from easy policies in an economy like India should be gradual. “The RBI has done exactly that and will continue”
• Goyal said monetary and fiscal policy have space to smooth the oil shock in a coordinated manner. It should be used to sustain the domestic investment cycle and the resulting job growth. “Avoiding over-reaction and excess volatility in rates and responses is important,” she said
• On Russia’s war, she said “the diversity of a large economy moderates shocks. There are some positive effects. For example, remittances and Indian wheat exports could rise”

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