NEW DELHI: The Russia-Ukraine conflict is likely to accelerate price pressures in the country as supply chains are getting disrupted and prices of crude oil, metals and other key commodities soar higher in global markets.
The surge in prices is likely to add more pressure on household budgets reeling under impact of the blows of the pandemic. The uncertainty triggered by the conflict and heightened price pressures are likely to pose fresh challenges for the authorities battling to revive growth and add fresh momentum to the ongoing economic recovery.
Both retail and wholesale prices have been firm in the country. Retail inflation jumped to a seven-month high in January on the back of higher food and beverages prices, while the wholesale price inflation eased marginally during the month but remained in double digits for the 10th month in a row. RBI governor Shaktikanta Das had said that 6% retail inflation should not surprise or create any alarm as the central bank had taken it into consideration. But, the war in Ukraine is likely to upset most of the calculations.
“Russia is a key energy exporter to rest of the world and hence its involvement in the geopolitical crisis with Ukraine has led to a jump in energy prices globally. This will impact India’s fuel inflation. If price of crude oil stays close to $100 per barrel (significantly higher than Economic Survey’s assumption of $70-75 per barrel), then change in average price of oil in FY23 vs FY22 could get close to 27-28%. This would impart a statistical upside of 80-85 basis points (100bps = 1 percentage point) on CPI inflation,” said Vivek Kumar, economist at data analytics firm QuantEco.
“If the crisis simmers for long, then overall impact on inflation would also include disruption impact from supplies of sunflower oil (an important edible oil consumed in the country), fertilisers (farm input) and palladium (input for EVs and gems & jewellery). We continue to stick to our above consensus call of 5. 3% CPI inflation in FY23 and closely review signs of persistence in commodity prices,” said Kumar.
It is estimated that a $10 per barrel increase in price of oil reduces growth by 0. 2-0. 3 percentage points, increases WPI inflation by about 1. 7 percentage points and worsens CAD (current account deficit) by $910 billion. According to an RBI estimate, a 10% change in crude oil prices impacts retail inflation by 30bps. Edible oil prices, which have been ruling higher, are likely to face the brunt of supply disruptions, leading to high domestic prices.