The resurgence of international crude oil prices needs close attention.

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While the Monetary Policy Committee (MPC) expects inflation to peak in the fourth quarter of this fiscal year, the Reserve Bank of India Governor Shaktikanta Das said in the minutes of the MPC meeting released on Thursday that the renewed surge in international crude oil prices will require close monitoring.

“We must be vigilant about the dangers to domestic inflation posed by rising international commodity prices as a result of exogenous variables such as geopolitical developments,” the Governor is quoted as saying. The meeting took place on February 8-10, 2022, and the committee decided to maintain its accommodating policy at historically low interest-rates.

Inflation is expected to decline in the first half of FY23 and then move closer to the target rate, giving the MPC flexibility to remain accommodating. “The Government’s timely and appropriate supply-side measures have greatly helped restrain inflationary pressures,” the committee said.

The committee noted that, given the current geopolitical tensions between Russia and Ukraine, an increase in input costs is a possible danger, particularly if international crude oil prices continue high.

Dr. Mridul K. Saggar, a member of the panel, stated that energy price uncertainty has increased significantly. In the last two months, the Indian crude oil basket has increased by about 25%. The current geopolitical tension in Europe poses a considerable risk, and if it results in a spike in oil and gas prices, we will need to alter our macroeconomic policies accordingly,” he said.

International oil prices soared to a seven-year high of $103 a barrel on Thursday as a result of Russia’s invasion of Ukraine.

India is the world’s third-largest oil consumer, with imports accounting for 85 percent of its requirements. Domestic fuel prices are directly related to global oil prices and have remained steady for a record 113 days. Since a price drop was announced in November, amid elections in Uttar Pradesh, Punjab, Goa, Manipur, and Uttarakhand, fuel prices have stayed constant.

Pulses and edible oil prices are expected to soften further as a result of the government’s significant supply-side actions and increased domestic output.

Private consumption and contact-intensive services are still below pre-pandemic levels, therefore domestic economic activity is still recovering unevenly.

The current third wave of the pandemic is expected to have a lower impact on the recovery than previous waves, improving the outlook for contact-intensive services and urban demand.

Global financial market volatility, rising international commodity prices, particularly crude oil, and ongoing global supply-side disruptions all represent threats to the forecast.

In 2022, however, the global macroeconomic environment will be marked by a deceleration in global demand, owing to rising headwinds from financial market volatility induced by monetary policy normalization in the systemic advanced economies (AEs) and inflationary pressures from persistent supply chain disruptions.

COVID-19 continues to cast doubt on the future outlook, according to the MPC, which believes that the ongoing domestic recovery is still insufficient and requires continued policy support.

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