High crude oil, unsustainable commodity prices, says Finmin

“India has positioned itself well to cope with the increase in import basket costs; Wholesale inflation is set to ease soon

“India has positioned itself well to cope with the increase in import basket costs; Wholesale inflation is set to ease soon

The Treasury Ministry called current price levels “unsustainable” and said on Tuesday those prices were likely to fall soon, while claiming that India’s record foreign exchange reserves are well-positioned to deal with escalating import costs.

The impact of recent developments, including the Ukraine-Russia crisis, on India’s growth, inflation, current account and budget deficits will depend on commodity prices remaining at high levels, the ministry noted.

“Given the inherently unsustainable nature of high prices, international commodity prices are expected to settle early with an increase in supply outside the crisis zone,” the ministry forecast in its monthly economic report for February.

Geopolitical tensions between Russia and Ukraine, the ministry said, have triggered “massive turmoil in the global economy,” with prices of crude oil and other commodities skyrocketing and “escalating the cost of India’s import basket.” However, its impact on India’s activity level this month can only be assessed a month later, it said, noting that foreign exchange reserves are sufficient to fund imports for over 12 months.

Geopolitical developments have introduced an element of uncertainty into the outlook for economic growth and inflation in the new fiscal year 2022-23, the Treasury Ministry acknowledged. “However, the budget, with its investment bias and cautious assumptions together with strong macroeconomic fundamentals, will support growth and provide a floor for it amid global political turmoil and likely higher volatility in financial markets,” he stressed.

Crude oil price movements are expected to dominate the inflation trend in the coming months and the government is taking steps to mitigate the adverse impact of this “imported inflation” such as diversifying India’s import and energy sources beyond traditional hydrocarbons to ” emerging fuels” such as ethanol and compressed biogas, the ministry said.

Regarding the rise in wholesale inflation, which averaged 12.7% between April 2021 and February 2022, the ministry said part of the observed rise is due to the low base in the same period last year when wholesale prices recorded inflation of just recorded 0.7%. As the base effect wears off, the wholesale inflation rate should weaken, the ministry argued.

“Crude oil prices surged in February 2022 due to supply-demand imbalances and geopolitical tensions between Russia and Ukraine. The price of India’s basket of crude oil has increased by 43.8% from April 2021 to February 2022. The average price in February is USD 93.1/barrel,” she stressed.

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