Inflation: Oil at a reduced price, monetary pact a way out?

Consumer Price Index (CPI) inflation edged slightly above RBI’s upper tolerance limit of 6%. It was 6.07% in February and 6.01% in January. According to Crisil, average CPI inflation will be 5.4% if crude oil averages between $85 and $90 a barrel in fiscal 2023, while it will be 5.8% at $100 per barrel, 6.1% at $110 per barrel and 6.4% at $120 per barrel. Experts say there is no need for a knee-jerk political reaction. Instead, the government should spread out the impact of rising oil prices. “Small daily adjustments over a period will not lead to inflationary expectations and will be accepted by people. This is a correct approach,” he said, adding that India should buy Russian oil offered at a discount. Oil Corporation bought three million barrels of Russian Urals crude, while HPCL bought two million barrels from European traders Mangalore Refineries and Petrochemicals Ltd. also launched a tender for the purchase of one million barrels of discounted Russian crude oil, however, these supplies are miniscule considering that India’s annual consumption is 1,500 million barrels.

And that’s where bilateral currency pacts to circumvent dollar trade come in. India and Russia are looking at a ruble-ruble pact. Professor Biswajit Dhar of the Center for Economic Studies and Planning at Jawahar Lal Nehru University, told Fortune India that there is a sense of urgency on both sides to sign the pact as Russia cannot maintain its economy in limbo for a long time. Payments from a number of Indian exporters to Russia are also blocked.

“Overcoming bottlenecks created by sanctions becomes imperative as it affects business. It is important to sit down and find a solution that protects the interests of both parties. They will also have to reach some kind of consensus on the exchange rate because the ruble is currently very volatile,” says Dhar.

But there is downside risk to measures such as currency pacts and cut-price purchases on crude oil – sanctions on Russian energy supplies, although the extent is still uncertain. “Sanctions are unlikely to be extended to oil imports because, unlike Iran sanctions, which did not affect US allies, sanctions on Russian crude oil will affect US European allies. growth if not addressed early,” says Dhar.

Currency experts say that in addition to being a stopgap, bilateral currency pacts can serve as a long-term payment mechanism to reduce dependence on the dollar. The widespread use of the US dollar gives the country many powers which it exercises through tariffs, sanctions and bans on blacklisted countries and companies.

“Alternative mechanisms such as providing a bilateral agreement similar to the one with Iran and allowing companies from both countries to exchange rupees through escrow accounts will bring relief to the Indian economy and its importers and exporters. “, says Heena Imtiaz Naik, Research Analyst (Currencies), Angel One Ltd. “There could be an opportunity for India to avoid using dollars and opt for country-specific currencies to avoid dependence on a third party,” Naik says.

In a relief of sorts, the war is changing global power equations, giving India more options for sourcing crude oil, which will directly affect inflationary pressures. The United States is considering lifting sanctions on Iran so that Iranian oil can enter world markets and drive down prices. Interestingly, the Iranian ambassador in New Delhi, Ali Chegeni, offered India a rupee-rial trade deal. The United States is also trying to ease restrictions on Venezuela in order to increase oil supplies.

However, what may complicate matters is that the dispute came at a time when RBI needed to suck up the cash released after the coronavirus outbreak in 2020. Even though the RBI Governor assured adequate liquidity, Crisil s It is expected that under the base case CPI inflation of 5.4%, the RBI will increase the repo rate by 50 to 75 basis points in FY2023.” RBI will now have to answer a call to prevent inflation from rising significantly and at the same time support growth,” says Dipti Deshpande, senior economist at Crisil. That said, with the conflict in Europe, balancing growth and inflation, while factoring in government borrowing costs, will be nothing short of a tightrope walk.