Triggered by the uncertainty in the global banking sector, crude oil prices have crashed by over 10 percent over the last ten days to less than $75 a barrel. The Brent crude to which most of India’s crude imports are linked is now trading at $73 a barrel, indicating that actual inflation may end up lower given that RBI’s assumption is $95 a barrel for its inflation forecast of 6.5 percent for FY’23.
” While we still attribute some probability for a final rate hike from the RBI, recent events may very well weigh against this” said Suyash Choudhary, Head, Fixed Income at Bandhan Mutual Fund.
Economists estimate that a $10 drop in crude prices could impact retail inflation by upto 50 bps and could rein in the impact of sticky food inflation and the development in the global financial markets.
“Prevailing Brent crude prices are well below the RBI’s assumption of $95bbl, suggesting imported inflationary pressures continue to moderate,” said Radhika Rao, Senior Economist, executive director, DBS Bank, Singapore.
The banking crisis in the United States is expected to have a spillover impact on the wider global and the US Fed could potentially $2 trillion in the banking system according to market experts which could also impact the Fed policy rate action and in turn RBI’s decision. “The key determinant of the April policy decision would be the state of the financial markets/ confidence level ” said Anubhuti Sahay head of South Asia Economics Research at Standard Chartered Bank. ” Inflation is high in India but is expected to come off towards 5% in FY24″.
If the banking stress intensifies, the Fed may well pause rate hikes to assess the situation, and the Fed and other central banks could convene emergency meetings to provide guidance and stem potential panic, said a report by Moody’s Investor Service.In the past two months, even as energy-related segments are easing, core inflation remains sticky. Food has assumed the driver’s seat in lifting the print on dearer cereal and protein costs , even as the usually volatile vegetables have eased.
But these developments may weigh on only later, feel some economists. Base effects will turn favourable from Mar23, helping to pull headline readings lower. Yet the trajectory for food will be dictated by weather conditions. ” Upside risk to RBI’s 1Q23 inflation forecast, firm core prints and above-target CPI in Jan-Feb23, are likely to the MPC lean towards a 25bp hike in April, with an unchanged stance” said Rao.” Beyond that, we expect a pause on rates to allow the lagged impact of hikes to filter through, a likely benign inflation profile (with an eye on risks) and attention on growth conditions”.
