RBI paper says 10% jump in crude prices can lead to 0.20% rise in domestic inflation

A 10 per cent increase in global crude oil prices can raise the domestic headline inflation by 0.20 per cent, a paper by RBI staffers released on Wednesday said.

The paper on oil price and inflation nexus in India by Sujata Kundu, Soumasree Tewari and Indranil Bhattacharyya also asked for policy measures to decrease reliance on imported crude through ways such as alternate non-fossil energy usage.

The paper does not represent the views of the central bank.

In the current context, it is necessary to understand that a surge in oil prices has the potential to have a "debilitating" impact on the Indian economy, it noted.

"The current global economic scenario, characterised by increasing trade fragmentation, supply chain disruptions and intensifying tariff wars, can shrink global trade sharply and thereby derail global growth. The resultant oil price volatility can be debilitating for the Indian economy at this stage," the paper reads.

Sudden oil price surges can impact the undergoing disinflation process and thwart policy normalisation, it said, giving out details of the likely impact.

"The results of the empirical analysis suggest that a 10 per cent increase in international crude oil prices could raise India's headline inflation by around 20 basis points on a contemporaneous basis," the paper said.

Noting that the government also has a lever in the form of excise duties on petroleum products which influence the prices at the pumps, it said that despite this, the crude prices have an important role.

"Unless retail fuel prices change, there is no direct impact of higher international oil prices on CPI. However, persistent increase in oil price can impact WPI and core (excluding food and fuel) in the form of higher transportation and input costs. It also has the potential to unhinge inflation expectations, thus changing the inflation path," the paper said.

Additionally, higher energy prices can raise inflation expectations of consumers and businesses, indirectly exerting pressure on food and core inflation, it said.

As current international prices are moderating consistently owing to increase in supply and fall in demand due to global economic slowdown, this augurs well for inflation as indicated by the limited passthrough to domestic prices, the paper said.

Active government intervention has contained spillover to domestic prices, but policymakers need to be "vigilant and cautious" of the direct and indirect impact of the evolving global crude price dynamics through continuous assessment, it said.

Reducing crude oil dependence by promoting alternate non-fossil energy usage and regional free trade agreements and bilateral treaties with major oil exporters could be explored for oil imports at favourable prices, it suggested.