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(Bloomberg) — India’s central bank governor said the Middle East crisis could fuel persistent inflation if supply disruptions endure, given the country’s deep economic links to the region.
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“Second-round effects are the real concern,” Governor Sanjay Malhotra said in a speech at Princeton University, his alma mater, on Saturday. A copy of the speech was uploaded on the Reserve Bank of India website Monday. Such effects refer to initial price shocks feeding into broader, more sustained inflation.
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“What began as a supply shock can become embedded in the general price level,” Malhotra said. “Preventing this entrenchment is where monetary policy has a primary role to play.”
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The Middle East conflict is affecting India’s energy security and trade, given the region accounts for about one-sixth of exports, one-fifth of imports, half of crude oil shipments and a significant share of fertilizer imports and remittances.
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India has so far avoided the sharp fuel price hikes seen elsewhere, as state-run refiners absorbed losses. That may change after key regional elections this month, as pressures build and the conflict drags on. Any price increase by state-owned refiners would add to inflationary pressures already weighing on the economy.
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Malhotra said the RBI would step in “through its influence on inflation expectations rather than through blunt demand compression.” Rate hikes are often seen as a blunt tool, as they curb demand across the economy, dampening both inflation and growth.
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The central bank will remain in a “wait and watch” mode and has become “even more data dependent,” Malhotra said. The RBI held rates steady in April to assess the impact of surging oil prices on the economy. After the monetary policy decision, Malhotra said that rates were likely to remain on hold in the near to medium term, but stopped short of committing, citing uncertainty that could push them in either direction.
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