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RBI Warns of Inflation Risks from Rising Oil Import Dependence
In light of global crude oil price volatility, the Reserve Bank of India (RBI) has called for sustained vigilance and policy responsiveness to mitigate inflationary risks for India, a country heavily dependent on crude oil imports. In a paper titled ‘Revisiting the Oil Price and Inflation Nexus in India’ published in its latest Bulletin, the central bank highlighted the need for continuous assessment of both direct and indirect impacts of oil prices on the Indian economy.
The RBI noted that while government intervention through taxes, cesses, and regulation of oil marketing companies has helped contain the pass-through of global crude oil price changes to domestic fuel prices, the country’s increasing import reliance could pose long-term inflationary risks. “A 10 percent increase in international crude oil prices could raise India’s headline inflation by around 20 basis points on a contemporaneous basis”, the Reserve Bank of India paper estimated.
The paper also underscored that the inflationary effect of oil is not limited to retail fuel prices but extends to input and transportation costs, particularly in the post-deregulation period. This makes oil price dynamics a critical factor in monetary policy formulation, especially for economies like India that are vulnerable to external oil shocks.
To reduce dependence and improve energy security, the RBI recommended exploring alternative strategies such as promoting non-fossil energy usage and pursuing regional free trade agreements and bilateral deals with major oil-exporting nations to secure more favourable pricing.
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