One more headache for RBI: Oil all set to upset its inflation math

By Anirban Nag and Vrishti Beniwal

A rebound in oil prices poses a risk to Indias benign inflation expectations tha t last week allowed the central bank to deliver its second rate cut of 2019.

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

The low headline print gave Governor Shaktikanta Das 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 dont spike. Data on Friday showed headline inflation quickened to a five-month high of 2.86 percent in March from 2.57 percent in February.

The RBI last week cut its inflation forecast to a range of 2.9 percent to 3 percent in the April-September period, compared with a February projection of 3.2 percent to 3.4 percent, while seeing price growth this year within its 4 percent medium-term target. It separately cut economic growth forecast to 7.2 percent for the year that began on April 1, down from 7.4 percent previously.

“The recent rise in crude 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 worlds 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 consumer prices.

Rupee Offset
Oils 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 Kotak Mahindra Bank Ltd. EconoRead More – Source

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