Rising mercury, uncertain crude prices, prolonged wars are inflation risks: RBI

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In its bulletin releasen of April 24, the Reserve Bank of India has highlighted the risk of inflation. Despite the Indian economy’s good performance, maintaining a steady pace with an impressive 8% growth rate during the three quarters of FY ’24, and experiencing a notable decline in inflation to 4.9% in March, there are lingering concerns among economists at the Reserve Bank of India (RBI).

There are external factors such as geopolitical tensions and fluctuations in international markets that could impact the Indian economy. These uncertainties make it essential for policymakers to remain vigilant and adaptable to changing circumstances.

“This trajectory was along anticipated lines, with fourth quarter of 2023-24 inflation outcome of 5 per cent in alignment with projections,” the report said.

Potential reasons of inflation

Extreme weather: The cautionary stance of RBI economists underscores the potential risks posed by external factors that could disrupt the current stability of the Indian economy. Two significant factors they emphasise are weather conditions and geopolitical tensions. Extreme weather conditions can have widespread ramifications, particularly in an agrarian economy like India’s. Natural disasters can disrupt agricultural production, leading to shortages and price hikes for essential commodities. Contributing to inflationary pressures as the cost of goods and services rises.

International incidents: Geopolitical tensions add another layer of uncertainty, particularly concerning crude oil prices. India is heavily dependent on oil imports to meet its energy needs, and any disruptions in the global oil supply chain due to geopolitical conflicts can lead to volatility in prices. Sharp increases in oil prices can have cascading effects on various sectors of the economy, including transportation, manufacturing, and consumer goods, ultimately impacting inflation levels.

“With 4 per cent inflation finally being sighted, there is greater confidence now that the descent of inflation to the target is imminent,” the report said. The report highlighted that as alignment with the inflation target progresses gradually, upcoming data will offer more clarity and confidence regarding the path towards disinflation.