India Ratings and Research on March 31 said the rising global commodity prices would affect the retail and wholesale inflation differently leading to policy implications.
"Ind-Ra opines that the differentiated playout of headline retail and wholesale inflation in response to the surge in global commodity prices over the past six months will have policy implications. Though commodity prices in the past three weeks have witnessed some easing, they are still significantly higher than September 2020 levels. This firming up of global commodity prices would mean a rise in input prices and/or margin pressure for the production sector.," the agency said.
As a result, the Reserve Bank of India (RBI) is likely to continue with its current policy stance/rate to support the ongoing economic recovery and this would mean a relaxed monetary policy approach even while the price pressure is building up in the economy, Ind-Ra said in a statement.
It further said that the situation with respect to wholesale inflation is different. As per the agency's analysis, a price increase of 1 percent in edible and crude oil will increase the retail and wholesale inflation by 7bp and 13bp, respectively.
There are already signs that the increase in industrial raw material prices are getting passed on to output prices. A higher retail inflation not accompanied by a commensurate increase in wage growth means a lower disposable income/consumption demand which would adversely impact the investment revival in the economy, it said.
"Ind-Ra, therefore, believes the headline wholesale inflation, in addition to retail inflation, should be a key monitorable for the policy makers so that appropriate measures are taken at the appropriate time and not when commodity prices have already manifested itself fully into the retail inflation," it added.
Ind Ra warned that since India is a net commodity importer and India's dependence on oil is high, the surge in global commodity prices will have serious implication for its economy which is still struggling to come out of the COVID-19 impact.
Though a spike in global agricultural commodity prices could benefit India, it may not move the needle favourably because India, despite the world’s biggest exporter of basmati rice, exported just $6.59 billion worth of cereals and imported vegetable oil and pulses worth $9.66 billion and $1.44 billion, respectively, in FY20.
On the other hand, India’s import bill on oil, coal and nonferrous metals was $129.86 billion, $22.45 billion and $13.14 billion, respectively, it concluded.