While food inflation remains a concern, the second-order effects from higher input prices are likely to be more benign than initially estimated. Lower commodity prices, particularly of crude oil, should reduce risks of imported inflation.
This could cushion the negative impact on the Indian currency, which is being pummelled over concerns of a record high trade deficit and continued withdrawal from Indian financial assets by foreign funds.
“If oil prices sustain at the lower level, say around $100 per barrel, it erases the need for upward revision of inflation by the Monetary Policy Committee,” said Madan Sabnavis, chief economist, . “Other commodity prices have already started softening since May. If the (softening) trend extends, it should help narrow the trade deficit, a key concern that weighs on the rupee’s value against the dollar.”
The rupee gained 0.09% to close at 79.30 to a dollar Wednesday. It was the fourth-best performing Asian currency during the day, showed Bloomberg data compiled by ETIG. It hit a lifetime low of 79.38/$ on Tuesday.
Commodity prices, which surged to record highs, are easing. The Bloomberg Commodity Price Index was at 112.2 on Wednesday versus 129.03 on April 22, when the central bank published the minutes of the meeting of its rate-setting panel. The gauge dropped 13% during the period.
“The broad-based jump in global commodity prices has exacerbated inflationary pressures across advanced economies and emerging market economies alike causing a sharp revision in their inflation projections,” the MPC had then said in the policy statement.
Similarly, the LME Metal index, which encompasses six variants, was at 3,696.80 on July 5 versus 5,060.60 in the third week of April, recording a plunge of about 27%, showed data compiled by ETIG.
Brent crude oil has been falling in the past few days amid concerns of a recession.
“If oil prices remain softer, we are unlikely to see any upward revision of inflation prices,” said Rahul Bajoria, India economist at Barclays. “The monsoons will play a key role here, influencing food prices along with crude oil. We need to see how overall commodity prices are shaping up in the coming weeks, helping the trade deficit to narrow.”
Lower oil prices should help bridge the trade gap. “Any reduction of the trade deficit will work well, arresting any sudden loss of the rupee’s value to the dollar,” he said.
On the assumption of a normal monsoon in 2022 and average crude oil price (Indian basket) of $105 per barrel, the RBI projected inflation at 6.7% in FY23 at its June policy, having revised upward its earlier estimate by 100 basis points.
