RBI MPC meets as energy crisis raises concerns over economic recovery
Rising oil prices and coal shortages risk stoking inflation and slowing economic growth in India ahead of a central bank meeting, while punishing the country’s currency and bonds.
A lack of coal means factories could close, while forcing India to import more fossil fuels at a time when crude prices, at their highest level in seven years, are already weighing on this energy-hungry country . The threat of inflation and the widening external deficit have caused the country’s benchmark bond yields to rise 12 basis points over the past two weeks and the rupee to fall.
“This is a negative economic shock because it will lead to higher inflation, lower growth and potentially larger twin deficits,” said Sonal Varma, chief economist for India and Asia, outside Japan, at Nomura Holdings Inc. in Singapore. “The continued increase in inflationary pressures could lead to weak demand over time,” she said.
While the gains in consumer prices are, for now, within the Reserve Bank of India’s 2% to 6% target range, the baseline measure – which removes volatile components from food and energy – should stay around the 6% mark. at least for the next six months, according to Deutsche Bank AG.
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Faster inflation due to supply disruptions will be a challenge for the RBI targeting the CPI, which intends to keep borrowing costs at record levels to support sustainable economic growth. While their counterparts in emerging markets such as Russia and Brazil have raised rates to combat price pressures, economists polled by Bloomberg believe Indian policymakers are keeping the key rate at 4% on Friday.
Traders will be eagerly awaiting the RBI’s take on soaring global commodity prices and its assessment of inflation and liquidity, even as they have started to incorporate policy normalization by decreasing buying of commodities. ‘bonds and cash withdrawal.
Citigroup Inc. expects the RBI to raise its repo rate – which marks the lower end of the central bank’s policy corridor – by 15 basis points to 3.50%.
The rupee fell 0.2% to 74.4487 per dollar on Tuesday, becoming the worst performing currency in emerging Asia, while 10-year bond yields jumped to 6.28%, the highest since April 2020.
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“The energy crisis and tighter global financial conditions may mean that foreign investors begin to demand a higher risk premium from emerging markets and may start to put pressure on assets in emerging markets, including India,” he said. said Madhavi Arora, chief economist at Emkay Global Financial Services Ltd. oil prices in a context of changing global dynamics could add further complications to the RBI’s reaction function.