RBI may change stance if high crude oil prices persist: Sunil Sinha

Economist Sunil Sinha suggests the RBI might reconsider its policy stance if crude oil prices remain above $100 and high inflation persists. These factors, along with a poor monsoon, pose significant challenges to the Indian economy's growth.

Crude oil prices remaining above USD 100 per barrel for several days could prompt the Reserve Bank of India (RBI) to take a closer look at its policy stance, as persistent inflation and elevated oil prices pose challenges for the Indian economy, said Sunil Sinha, Former Senior Economist at NCAER and Former Principal Economist and Director, Public Finance at India Ratings & Research.

RBI's Stance on Inflation and Oil Prices

In an exclusive conversation with ANI, Sinha said the current economic situation was not favourable and the RBI would have to closely assess the underlying inflationary pressures in the economy before taking a decision on interest rates.

He said if the recent rise in both consumer price inflation (CPI) and wholesale price inflation (WPI) turns out to be temporary, the RBI may not immediately raise interest rates. However, if the elevated inflation continues, the central bank could reconsider its stance.

"At the current juncture, the way both CPI and wholesale price inflation have been trending, it looks unlikely that either the CPI or the WPI inflation is going to come down anytime soon," Sinha said.

He also pointed to the rise in crude oil prices, saying the impact becomes more significant when prices remain elevated for several days. "The oil prices have not only crossed USD 100 a barrel, but they are hovering around that level for almost several days," he said.

According to Sinha, if the RBI becomes convinced that the current inflationary and oil price pressures will persist for some time, there is a possibility that the central bank could change its stance and go for a reversal. He said “So under such circumstances, RBI probably would take a closer look and if it gets convinced that the current scenario is going to persist and last for some time, then there is going to be a possibility that RBI may change its stance and go for a reversal”.

Economic Growth vs Headwinds

At the same time, he said India's economic growth still has some underlying momentum, which has supported stronger-than-expected GDP numbers. However, high inflation could affect growth in the coming quarters.

Monsoon and Crop Outlook

Sinha said the monsoon had not played out normally, which could affect the Kharif crop and add to inflationary pressures.

High Base Effect on GDP

He also highlighted the high base for the second quarter. GDP growth stood at 8.1 per cent in the second quarter of the previous year, making it challenging to repeat a similar performance amid inflation and geopolitical uncertainty.

Foreign Exchange Position

On India's foreign exchange position, Sinha said record mobilisation of dollars would provide a cushion to the country's forex reserves and current account balance. However, he cautioned that this should not be viewed as a permanent solution.

He added If crude prices remain elevated, it could put pressure on India's current account balance. (ANI)

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