RBI policy may revise inflation projections as there are also doubts over monsoon
Rising oil prices kept the pressure on the rupee, which slipped 39 paise on Thursday to end at Rs 70.26 to the dollar, a level seen nearly four weeks back. Brent crude hit six month high of $75 a barrel, following the US government's decision to impose sanctions on countries importing from Iran from May 2. This is a departure from the current position where it had given exemption to countries including India. The rupee had opened at Rs 70.02 against the dollar and touched a low of Rs 70.26 against the dollar as the oil prices continued to play spoilsport.
With rupee on slippery ground inflation is back in focus. Doubts about a normal monsoon and the rise in oil prices is likely to force Reserve Bank of India to revise its projections in the next policy review in June. With benign food prices for close to a year, the central bank had cut its retail inflation forecast to 2.9-3% for the first half of the current fiscal in April, when it unveiled the first monetary policy of the fiscal.
"Rising oil prices and prospects of geopolitical tensions on account of the US sanctions on Iran are a cause of worry for India," said Ananth Narayan, professor at S P Jain Institute of Management and former head of global markets at Standard Chartered Bank in India.
Last time, the rupee went past the 70-mark was on March 11. The 10-year bond yield was trading at 7.442%, from its Wednesday's close of 7.425%. With crude oil prices at $75 a barrel and the US government threatening to end its existing waiver of sanctions against countries like India for importing oil from Iran, the prospects oil prices softening look slim.
"We import about 1.2 billion barrels of oil for our domestic consumption. At current oil prices, India's annualised current account deficit could be in the region of $75 billion. Even with FDI inflows of about $35 billion, we are looking at permanent outflows of $40 billion to be covered by portfolio flows and borrowings. Sustained high oil prices will also pressure the already stretched fiscal position and inflation. While India has buffers of adequate currency reserves, sustained high oil prices can threaten India's financial stability," Narayan said.
Inflation was less of a worry for the central bank in the last few quarters, but fresh worries have now surfaced.
"Inflation can never be off the table. RBI's projections were based on normal rains and affordable food prices. But they also say that every $10 dollar rise in crude oil prices adds 30 basis points to inflation," said Saugata Bhattacharya, chief economist with Axis Bank.
A possible increase in fuel prices due to US sanctions on Iranian crude exports can have an adverse impact on the current account deficit (CAD), rupee and inflation, said a report from rating agency CARE. The agency in its report said a 10% spike in crude oil prices can result in 0.40% widening of CAD, which can consequently play out into 3% to 4% depreciation in the rupee and also push up inflation by 0.24%.
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Last time, the rupee went past the 70-mark was on March 11. The 10-year bond yield was trading at 7.442%, from its Wednesday's close of 7.425%. With crude oil prices at $75 a barrel and the US government threatening to end its existing waiver of sanctions against countries like India for importing oil from Iran, the prospects oil prices softening look slim.)
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