Rising crude oil prices in the international market and increasing inflation due to a shortage of coal in the country may hinder the path of rapid economic growth. These things are very important because the policy meeting of the Reserve Bank of India (RBI) is going to be held this week, where speculations were being made for the last few days to increase the interest rates. About 70% of the electricity in the country is generated from coal and about 85% is imported from crude oil. A shortage of coal can cause factories to shut down, which is a problem. In such a situation, the import of crude oil may increase. That too when its price in the international market is running at a seven-year high and is putting pressure on the economy.
The currency and bond markets have been under heavy pressure due to the potential for widening the trade deficit due to both inflation and fuel (crude oil and coal) price hike. The rupee, which has been the weakest in Asian currency this month, fell 0.2% to 74.60 against the dollar on Wednesday. On Tuesday, the 10-year bond yield touched an all-time high of 6.28% since April 2020. Sonal Verma, Chief Economist – India, and Asia, Nomura Holdings Inc., says, "Both are an economic blow to the country. Because of them, inflation may rise, economic growth may stagnate, and trade deficit along with the budget deficit. As inflationary pressures continue to increase, demand tends to decline.
According to Deutsche Bank, retail inflation is currently in the RBI's comfort zone (4% to 2% above or below) i.e. in the 2% to 6% range. But core inflation is expected to remain close to 6% for at least the next six months. Core inflation does not include inflation in food and fuel with high volatility risks.
It will be challenging for RBI to handle inflation due to supply constraints. To boost growth, it wants to keep the prime lending rate (repo rate) at a record low. Developing countries like Russia and Brazil have increased the repo rates to control inflation. But according to a Bloomberg survey done on economists, RBI can keep the repo rate the same on Friday. Bond traders will focus on what RBI forecasts on global commodity market growth, inflation, and liquidity in the system. Bond purchases may be slowed down for liquidity withdrawal.
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