Geopolitical environment could trigger fresh concerns for crude oil and natural gas: Finance Ministry

India’s inflationary pressure is currently in a moderate state with retail inflation eased to 6.7 percent in July 2022. However, the government is of the view that the geopolitical environment remains tense and fraught. “This could trigger fresh supply concerns in the winter for critical commodities such as crude oil and natural gas,” the Finance Ministry said in its latest monthly economic report on Friday. 

“The declining global prices of edible oils and the government’s measures to reduce the domestic prices of these commodities have had a profound impact on tempering India’s retail food inflation. Softening of inflationary pressures in India is further on the anvil as the prices of important raw materials such as iron ore, copper, tin and so on. Going forward, kharif sowing supported by southwest monsoon coupled with higher MSP for Kharif crops is likely to enhance rural demand,” the monthly economic report for July, drafted by the Finance Ministry’s economic division, mentioned. 

Despite global headwinds, the IMF forecasts India’s economy to grow at a robust rate of 7.4 per cent. However, with inflationary pressures unabated and also not expected to soften in the near term, a further tightening of monetary policy across the central banks cannot be ruled out. 

The MER report states that the Chinese economy is struggling and the central bank has unexpectedly lowered its policy rate signaling serious worries about growth. This move could trigger risk aversion in financial markets around the world that have begun celebrating, perhaps, prematurely, the easing of inflation pressures in the near term in the developed world.

“Inflation rates are still stubbornly high. Without further considerable policy tightening, it is difficult to see the inflation rate in the advanced world drop to around 2 per cent to 3 per cent.” the report

Vegetable price inflation, which was 18.3 per cent in May and 17.4 per in June, declined to 10.9 per cent in July contributing to overall decline in retail inflation. 

Price variations in vegetables are often on account of uncertain weather conditions but these can be mitigated by maintaining buffer stocks. Among non-food components, fuel and light inflation continues to increase. This could still be an outcome of supply chain issues although likely to be a temporary one, as declining global crude prices should eventually lower the inflation of fuel and light category as well, the report said.