RBI Monetary Policy | MPC may worry about inflation as energy costs rise, rupee depreciates

Reserve Bank of India (File image)

The monetary policy committee (MPC) is more likely to vote for holding the policy repo rate steady at 4 percent, notwithstanding rising inflationary pressures in the economy and the depreciation of the rupee. However, it may try to strike a balance between supporting growth with concerns of rising inflation in its stance. A revision of its projection for inflation for the second half of the financial year and the full year looks likely, given the twin challenges from the depreciating rupee and elevated international prices of commodities. The rupee fell to its six-month low of almost 75 to a dollar as the committee sat down for its three-day deliberation.

The rupee is expected to remain under pressure as the Federal Reserve has signalled reduced monthly buying of bonds from November and an imminent rise in interest rates. The current round of depreciation began soon after the Federal Reserve statement, and many fear that the rupee may test the level of 76-77 to a US dollar before the end of the year.

Given the composition of India’s import basket, depreciated rupee and higher commodity prices will mean not just more expensive fuels but also pricier inputs for a range of industries from electronic goods makers to pharmaceutical products manufacturers. China’s continuing power crisis will be another factor, as disruptions to supply chains can push up the costs of inputs.

Rising energy prices will continue to exert upward pressure on inflation, and its effect will be seen on the consumer price index (CPI). Power prices for households might not increase, as they are controlled by the regulators, but prices of petrol, diesel and liquefied petroleum gas continue to rise.

Prices of petroleum crude oil are expected to climb higher as the Organisation of Oil Exporting Countries Plus (OPEC+) has decided to continue with a gradual increase in supplies instead of boosting them amid rising demand. Already, prices have jumped to their highest in almost seven years following that decision at the October 4 meeting of OPEC+ members.

India’s crude basket climbed to $73.13 a barrel on average in September from $69.80 in August. It had climbed higher to $80.75 a barrel by October 6. International prices of natural gas prices have also flared since the last meeting of the MPC. Prices of compressed natural gas used by vehicles and piped natural gas used by households and other establishments for cooking were raised earlier this month after their administered prices were increased.

Shortages of coal and its rising prices will affect both growth and inflation. While the industry will take a direct hit, households can expect higher prices for finished goods. For instance, cement makers are expected to take another round of price hikes, increasing the cost of construction.

Elevated commodity prices, of metal and non-metals, will show up in the final prices that consumers will pay, as many manufacturers are planning another round of price increases.

In addition, households will be hit by the second-round effects of higher petroleum prices. There are already reports that higher cost of transportation has made fruits and vegetables pricier.

There is little that the RBI can do to control imported inflation. But, it can take a position to continue supporting growth by making available low-cost funds.