The geopolitical uncertainty from the conflict in Middle East could upend countries’ inflation and growth calculations, leading to a higher than expected inflation for India as well, according to Fitch Ratings.
“Higher oil prices would lead to higher-than-expected inflation rates in 2024, followed by corrections in 2025. Turkiye sees the highest percentage point rise in forecast inflation, followed by India and Poland. However, the India and Poland’s relative increases would be much larger,” the global rating agency noted.
The calculations assume oil prices going up to USD 120 per barrel in 2024 and staying elevated at USD 100 per barrel in 2025, owing to supply restrictions.
“World GDP growth would be 0.4pp lower in 2024, but only 0.1pp lower in 2025, although the absence of a significant rebound suggests there could be a persistent moderate impact beyond the initial shock,” Fitch said.
The rating agency predicted India to grow 6.3% in FY24 and maintain 6.5% growth until FY25.
It raised India’s potential growth to 6.2% last week, but still said that India is likely to grow slower than its pre-pandemic potential.
Oil prices of the Indian crude basket rose to USD 90.08 in October, compared with USD 83.76 at the start of the fiscal, but have since declined to USD 85.55 in November.
“The monetary policy response is quite muted in this scenario because a supply-side shock would increase price pressures through higher petrol prices and costs, but reduce demand from firms and households. Central banks would, all else being equal, look to increase policy rates to address higher inflation, but loosen policy in response to demand shortfalls,” Fitch said, leading to slower rate cuts in second half of 2024.
The Reserve Bank of India held policy rate at 6.5% for the fourth consecutive time in its October meeting and is likely to do so for its December meeting as well.
But experts indicate that it may end up delaying its rate cut further if inflation stays high.
An ET report indicated that retail inflation could move closer to 6% levels if prices of onions rise further.
“Within food, while the earlier Q3 surge in perishable food prices has corrected, pressures from non-perishable food prices persist. Even with the moderation in core inflation, we think the RBI is likely to remain cautious over a potential recurrence of supply shocks and their impact on inflation expectations, and thus keep rates on hold for longer, till at least Q3 2024, said Barclays economists in a report released Saturday.
Poly crises could add to uncertainties on growth for emerging market asia, according to Barclays.
“Going into 2024, the region still faces considerable uncertainty from ongoing conflicts and volatility in commodity prices,” Barclays further said.
Treading carefully
- Oil prices rising to USD 120 per barrel in 2024 could upset growth and inflation
- India’s inflation to be significantly affected
- Policy rate cuts could slow further
- World GDP could be 0.4 pp lower in 2024
