India needs to be vigilant on the inflation outlook on the back of fuel price hikes and a below normal monsoon forecast, the finance ministry said just days ahead of the monetary policy decision by the Reserve Bank of India ().
In its monthly economic review for May, the ministry’s Department of Economic Affairs said, “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.”
It added that the economy remains “cautiously resilient,” with domestic fundamentals broadly intact. It warned, however, that high fuel prices and weakening global growth momentum as a result of the US-Iran war are creating headwinds that India can’t fully avoid.
RBI’s Monetary Policy Committee is scheduled to meet next week, with the policy decision to be announced on Friday, 5 June. A tighter policy is likely as the central bank is seen taking steps to support the , which slid to a record low of near 97 per dollar this month.
Prices to rise soon?
The finance ministry said that though retail inflation remained below the RBI’s 4% target in April, wholesale price pressures rose sharply — indicating that the cost of producing goods is going up and businesses will likely pass it on to consumers in the coming months.
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 8.3% from a year earlier, up from 3.88% in March and above the 5.5% median estimate in a Bloomberg survey of economists, data released by the Ministry of Commerce and Industry showed.
Agile policy to tide over uncertainties
The duration of the disruption remains the “single most consequential variable for India’s external and price outlook,” the ministry said. That highlights how the Iran war is bearing on India’s economic prospects, particularly as supply disruptions have led to surge in prices of petrol, diesel and cooking gas.
Add to that, a significant rainfall deficit could translate into food inflation, weakening rural demand and aggregate growth.
“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 observed.
— With inputs from agencies