Food inflation on Ukraine crisis could force RBI to take charge of rates: Moody’s Analytics

Conflicts threaten global grain production and supplies of cooking oils and fertilizer exports, and are driving up the prices of basic commodities

Conflicts threaten global grain production and supplies of cooking oils and fertilizer exports, and are driving up the prices of basic commodities

India’s central bank could hike interest rates if food prices rise on a commodity rally amid the Ukraine crisis, Moody’s Analytics’ Steve Cochrane said on Wednesday.

The conflict in Ukraine is threatening world grain production and supplies of cooking oils and fertilizer exports, and is driving up commodity prices.

Last month, the Reserve Bank of India stuck to its accommodative policy to help the economy recover from the pandemic lows, keeping interest rates at record lows.

“RBI would like to leave interest rates unchanged for a while longer and not put obstacles in the way of the Indian economy. But if food prices rose any further, the RBI could raise interest rates and try to curb inflation,” said Mr. Cochrane, the chief economist for APAC at Moody’s Analytics, told Reuters.

The crisis has pushed up crude oil prices and caused a sharp rise in fertilizer prices, both of which are vital to India’s agricultural sector.

Even before the crisis, retail inflation in India, the world’s third largest importer of crude oil, had breached the upper limit of the RBI tolerance band, accelerating to a seven-month high of just over 6% in January.

Grocery prices, which make up almost half of the CPI, rose 5.43% year-on-year in January, compared to 4.05% the previous month. Cooking oil prices rose by almost a fifth compared to the previous year.

Mr Cochrane said a worst-case scenario could see Brent crude soar to $150 a barrel as Russian oil is pulled from the market, which could result in global growth of less than 1% year-on-year over several quarters.

“It would feel like a recession. It would weaken labor markets, slash incomes and increase poverty,” Cochrane said.

However, he still expects that the conflict will not spread beyond Ukraine and that there will be minor disruptions to the supply of oil, natural gas and other raw materials.

Moody’s Analytics operates independently of Moody’s Investors Service, the rating agency.

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