High crude prices amid the oil crisis in Iran pose inflationary risks in India. This may come in the way of monetary easing by the Reserve Bank of India (RBI), ratings agency CARE has said.
High crude oil prices would have a dual impact on India - increased trade deficit and subsidy pressure on the government, CARE said on Tuesday. “India consumed about 3.6 million barrels per day (bpd) in the fourth quarter of 2011, and this number is increasing,” Madan Sabnavis and Krithika Subramanian, economists at CARE, said in a report.
RBI is expected to set the rate reversal cycle rolling by the second quarter of financial year 2012-13. However, rate cuts may be postponed if inflation remains high.
Headline inflation, as measured by the wholesale price index (WPI), fell below seven per cent in January, raising hopes of an early rate reversal. Economists have, however, said the fall was primarily due to the high base effect, and there were chances of a mid-year rebound in inflation.
Developments in the oil producing zone could have an impact on mineral oil prices, which carry a 9.4 per cent weightage of in the WPI. Of this, the regulated category accounts for 6.4 per cent. “On account of the high subsidy provided by the government on oil products, there would be pressure on the government to either increase the subsidy level, or increase market prices of controlled products,” CARE said. An inflationary impact is unavoidable if the government chooses the latter option.
“Oil marketing companies, too, would be under pressure, depending on the extent to which they have to bear the burden of sharing of the overall cost,” the ratings agency added.
In the third-quarter monetary policy review last month, RBI had cut the cash reserve ratio by 50 basis points to ease liquidity conditions. The central bank, however, kept policy rates unchanged to continue to anchor medium-term inflation expectations. RBI is scheduled to announce the mid-quarter monetary and credit policy review on March 15.