India may need to increase retail fuel prices if the conflict in West Asia drags on, according to Reserve Bank of India (RBI) Governor Sanjay Malhotra. His remarks came after Prime Minister Narendra Modi urged voluntary austerity measures, including reducing petrol and diesel consumption and postponing gold purchases, to preserve foreign exchange reserves. The government has more than doubled the duty on gold and is likely to introduce additional measures to curb demand for imported goods in the coming days.
RBI Governor's Warning
Speaking at a conference hosted by the Swiss National Bank and the International Monetary Fund in Switzerland on Tuesday, Malhotra stated, "If this is to continue for a longer period of time, it is just a matter of time before the government will pass on some of the price increases." He noted that excise duties had been cut while state-run fuel retailers were absorbing the increase in crude prices as the conflict continues.
Inflation and Economic Outlook
India's inflation edged up to 3.5% in April from 3.4% in March, coming in lower than expected as the government absorbed higher crude costs. However, risks remain as rising energy prices from the conflict in the Persian Gulf weigh on the outlook. Supply-chain disruptions in the region are beginning to affect India. Malhotra emphasized that while the country has a framework of flexible inflation targeting, it is not sufficient in such times, and fiscal coordination becomes critical if the supply shock is as big as it is.
The RBI has forecast growth of 6.9% for the current financial year, with inflation averaging 4.6%. However, economists expect growth to slow further and inflation to rise due to the ongoing conflict. The RBI left its key policy repurchase rate unchanged at 5.25% in April.
Monetary Policy Approach
"We are being more and more data dependent. We are taking it more meeting by meeting," said the RBI governor. The RBI is being flexible in its approach and is ready to look through the shock if it is transitory, "but if it is entrenched, we need to take action," Malhotra added. The RBI's next monetary policy meeting is scheduled for June 5.
This article is based on a Bloomberg report.
