The rising commodity prices – especially oil and coal prices – expose India to macro risks on the already high inflation and growth fronts, said Morgan Stanley. There has been 14 per cent jump in oil prices to $83 per barrel and 15 per cent rise in coal rate to $200 per tonne.
Analysts at Morgan Stanley said, “This rise in energy prices, specifically oil, has prompted concerns of higher inflation, slower growth and whether this could lead to disruptive monetary policy tightening,” they said. They added that there are upside risks to inflation, and growth will only improve from a two-year compounded annual growth rate, which will lead to normalisation of the policy.
Inflation will move back toward 5.5 per cent by the quarter ending March 2022 after remaining below the 5 per cent mark in the next few readings, it said, noting that a continued rise in energy prices, specifically oil, increases inflation risks. Assuming a complete pass through, a 10 per cent rise in oil prices can increase CPI inflation by 0.40 per cent, while on the current account balance side, given India imports 80 per cent of oil demand, a 10 per cent rise in oil prices can widen the CAD (Current Account Deficit) by 0.30 per cent of GDP, it said. However, the handsome exports will ensure that the current account gap remains restricted to 1 per cent in FY22, they said.
On the growth front, while near-term risks have emerged due to supply- side shortages (semiconductor chips affecting auto sector, coal shortages affecting power generation), at the margin the situation has been stable, and the brokerage expects the impact to be transitory. High-frequency growth data is improving quickly, with most indicators having moved into positive zone on a two-year CAGR basis, it added. The RBI will start the process of policy normalisation with a 0.15-0.20 per cent hike in the reverse repo rate (at which it absorbs excess liquidity) in December and February, it said, adding that the central bank may also hike the repo rate in February if growth improves further.