Recent geopolitical risks emerging from the Russia-Ukraine conflict could pose upside risks to India’s inflation forecast and may necessitate a review of growth forecasts, said Reserve Bank of India Deputy Governor Michael Patra in an address on Friday.
However, it is reasonable to treat the impact of the geopolitical crisis as a “supply shock” for the purpose of monetary policy, said Patra, suggesting that central bank may choose to look through any inflationary impact brought on as a consequence of the crisis.
For India, direct trade and finance exposures in the context of the ongoing conflict are limited, said Patra. “Contagion could, however, impact India through a broader fallout on emerging market economies as an asset class.”
As such, the main transmission channel is likely to be global liquidity conditions, which are tightening, said Patra. “If worry were to give way to panic, liquidity, especially U.S. dollar funding, could dry up and markets could malfunction.”
Meanwhile, crude oil above $100 per barrel could lead to new macroeconomic headwinds and act as a second channel of contagion. A third channel could be inflated country risk premiums, which raise the cost of funding for emerging economies and reduce investment volumes, said Patra.
Monetary Policy Impact
Commenting on inflation, Patra said that international crude prices present an overwhelming risk to inflation. However, headroom exists to adjust excise duties, which, in turn, can delay the pass-through to pump prices, he said.
“On the other hand, prospects for the easing of food inflation remain bright with record production and buffer stocks,” said Patra. Strong supply-side interventions and increase in domestic production can check inflation in sensitive items like pulses and edible oil prices. However, a spillover from the geopolitical situation cannot be ruled out, he added.
Patra, however, took comfort in the fact that while cost-push pressures on core inflation remain elevated, selling prices of businesses remain subdued due to low pass-through of given the large amount of slack in the economy.