Extreme weather could push inflation up, warns RBI

The Reserve Bank of India (RBI) has flagged extreme weather events as a potential risk factor for inflation in its latest bulletin released today. This comes as a slight relief for consumers, with retail inflation based on the Consumer Price Index (CPI) easing to 4.9% in March after hovering around 5.1% for the previous two months.

However, the RBI cautioned that this positive trend might not be sustainable. The bulletin highlights concerns surrounding extreme weather conditions that could disrupt agricultural production and supply chains, leading to price hikes for essential commodities. Additionally, prolonged geopolitical tensions could keep crude oil prices volatile, further impacting inflation.

 

The Reserve Bank, which considers CPI for its bi-monthly monetary policy, has maintained the key interest rate at 6.5% since February 2023 due to inflation concerns. A 'State of the Economy' article in the Bulletin noted that global growth continued in the first quarter of 2024, with a positive outlook for world trade.

 

In major economies, Treasury yields and mortgage rates are rising because expectations of interest rate cuts are being reduced.

"In India, conditions are shaping up for an extension of a trend upshift in real GDP growth, backed by strong investment demand and upbeat business and consumer sentiments," the article said.

 

The RBI clarified that the opinions expressed in the Bulletin article belong to the authors and do not reflect the views of the Reserve Bank of India.

According to the monthly bulletin released by the RBI, the apex bank purchased $8.56 billion net in the spot foreign exchange market in February. No dollar sales were made by the RBI in the spot market during this month. In January, the central bank had bought a net of $1.95 billion in the spot market.

The Indian rupee strengthened by 0.2% against the dollar in February, trading between 82.8225 to 83.1150 units. As of the end of February, the RBI's net outstanding forward purchase was $9.69 billion, compared to $9.97 billion at the end of the previous month.

The central bank intervenes in both the spot and forward markets to control exchange rate fluctuations and maintain stability.