India Says Inflation Outlook Needs Vigilance Ahead of RBI Policy

rjw)suje0n}1a}1o4pkogycy_media_dl_1.png India's Ministry of Commerce & I

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(Bloomberg) — India needs to be vigilant on the inflation outlook in the country, officials at India’s finance ministry said just days ahead of a monetary policy decision by the country’s central bank, highlighting risks from a sub-par monsoon and recent fuel price hikes.

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The confluence of elevated global energy prices, a depreciating rupee, rising upstream cost pressures and the prospect of a below-normal monsoon calls for sustained policy vigilance, the ministry’s Department of Economic Affairs said in its monthly economic review for May. The economy remains “cautiously resilient,” with domestic fundamentals broadly intact, it said. 

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Still, it warned that elevated crude prices, tightening financial conditions and weakening global growth momentum following the Middle East conflict are creating headwinds that India can’t fully avoid. 

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The Reserve Bank of India’s Monetary Policy Committee is scheduled to meet next week, with an outcome to be announced on June 5. Expectations of tighter policy have risen as the central bank is seen taking steps to support the rupee, which slid to a record low of near 97 per dollar this month.

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The ministry said retail inflation remained below the RBI’s 4% target in April, but wholesale price pressures rose sharply, signaling that upstream costs may pass through to consumers in coming months. 

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Producer prices surged to just over a three-and-a-half-year high last month as elevated energy prices pushed up manufacturers’ input costs. The wholesale price index rose 8.30% from a year earlier, up from 3.88% in March and above the 5.50% median estimate in a Bloomberg survey of economists, data released by the Ministry of Commerce and Industry showed. 

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The duration of the Strait of Hormuz disruption remains the “single most consequential variable for India’s external and price outlook,” the report said. That underscores the damage to India’s economic prospects from the Iran war that has choked supply of essential cooking gas and disrupted supply of crude oil. 

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“Policy will need to remain agile across monetary, fiscal, and structural dimensions to navigate this period of compounded uncertainty, external and climatic, while keeping medium-term growth objectives firmly in view,” the ministry said.

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