Rising crude oil prices and weak monsoon increase inflation risks in India. Crisil predicts RBI may hike interest rates by 50 bps this fiscal year.
Rising crude oil prices have presented new challenges for India's economic stability. The increase in global oil prices directly threatens to impact domestic inflation.
Deepti Deshpande, Principal Economist at Crisil, has provided significant signals regarding this situation. According to her, the burden of inflation on the general public may increase in the coming days.
The Reserve Bank of India (RBI) is keeping a close watch on the situation. To control inflation, the central bank may take the tough decision of hiking interest rates.
According to Deshpande's analysis, there has been a major change in crude oil prices recently. Until some time ago, the price of oil was around $85 per barrel.
However, for the Indian basket, this price has now increased to about $120 per barrel. Expensive crude directly affects the production costs of companies.
When production becomes expensive for companies, they often pass the increased cost burden onto the end customers. This leads to an increase in the prices of goods in the market.
The challenge of inflation has been further complicated by a weak monsoon. A deficit of about 13% has been recorded in the southwest monsoon so far.
This lack of rain could directly affect the agricultural sector and food production. Due to lower production, the risk of rising food prices remains high.
A simultaneous rise in food and fuel prices could push the inflation rate above the target. This is why the market is now looking towards the RBI.
All eyes are now on the upcoming decisions of the Monetary Policy Committee (MPC). According to Crisil's estimates, a change in interest rates could be seen in the October meeting.
Despite the potential hike in interest rates, it is believed that corporate investment will not stop completely. Interest rates are not the only factor for investment.
Capacity utilization in the manufacturing sector is currently around 75%. This is a level that typically encourages companies to develop new capacities.
India's economy has several strong buffers to withstand global shocks. The balance sheets of Indian companies are currently in a very robust position.
The banking system has also seen improvement, and the level of NPAs remains quite low. Additionally, strong domestic demand is providing stability to the Indian economy.
Positive signals are also emerging regarding the strength of the Rupee. However, if crude oil prices and geopolitical tensions persist for a long time, these buffers could weaken.
The 10-year benchmark government bond (G-Sec Yield) is currently above 7%. It is expected that some softening may be seen by March.
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