India may have to raise retail fuel prices if the conflict in the Middle East drags on, Reserve Bank of India Governor Sanjay Malhotra said.
His remarks came after Prime Minister Narendra Modi called for voluntary austerity measures, including curbs on petrol and diesel consumption and postponing gold purchases to preserve foreign reserves. Tariffs on gold have been more than doubled and more measures are likely to curb demand for imported goods, Bloomberg News previously reported.
“If this is to continue for a longer period of time, it is only a matter of time before the government moves to some price increases,” Malhotra told a conference hosted by the Swiss National Bank and the International Monetary Fund in Switzerland on Tuesday. Excise taxes have been cut while state fuel retailers have absorbed the rise in oil prices as the conflict continues, he added.
India’s inflation edged up slightly to 3.48% in April from 3.40% in March, less than expected, as the government absorbed higher crude oil costs. However, risks remain as rising energy prices from the Middle East conflict weigh on the outlook.
Supply chain disruption in the region is beginning to affect India. “We have this framework of flexible inflation targeting, but it’s not enough in times like this,” he said, adding that fiscal coordination becomes critical “if the supply shock is as big as it is.”
The RBI has forecast growth of 6.9% this financial year, with inflation averaging 4.6%. However, economists expect a further slowdown in growth and a rise in inflation due to the conflict. The RBI kept its key repo rate unchanged at 5.25% in April.
“We are increasingly dependent on data. We are taking it more meeting by meeting,” the RBI governor said. The RBI is flexible in its approach and is ready to ride out the shock if it is transitory, “but if it is entrenched, we have to act,” Malhotra said. The next monetary policy meeting of the central bank is scheduled for June 5.
