Volatile crude oil prices in near-term could pose risk to inflation outlook: RBI

Continuation of production cuts by OPEC+25 coupled with mounting uncertainties stemming from the conflict in West Asia could keep crude oil prices volatile in the near term and pose a risk to the inflation outlook, the apex bank said.

“An oil price surge of 10 per cent from the baseline of $85 per barrel could weaken domestic growth by 15 basis points and increase inflation by 30 basis points. The declining oil intensity of GDP (i.e., the volume of oil consumed per unit of GDP) could, however, offset the impact of the oil price shock,” the RBI stated in a note.

As per the RBI report, on the domestic side, the impact of El Niño conditions could present a challenge to agricultural output and food prices. “While the decline in global commodity prices and effective domestic supply management could help moderate food inflation, the impact of higher rural inflation relative to the urban sector, as witnessed in recent months, could have a more pronounced impact on rural demand,” RBI added.

Real GDP grew by 7.6 per cent in the second quarter of 2023-24, buoyed by strong consumption and investment growth that offset the drag from a decline in exports.

The RBI believes that spillover effects from the slowdown in world trade, tighter global financial conditions, increasing fragmentation, and geopolitical strife would remain contingent risks to external demand.

Talking about headline inflation, it said that headline inflation is progressively aligning with the medium-term target of 4 per cent. “It has eased to 5.6 per cent in November 2023 but remains susceptible to food price shocks. Meanwhile, core inflation (i.e., consumer price Index (CPI) excluding food and fuel) is exhibiting a sustained disinflation, easing to 4.1,” it added further.