RBI Governor Warns Fuel Price Hike Likely if West Asia Crisis Continues

Sanjay Malhotra, Governor of the Reserve Bank of India, has signalled that Indian consumers may soon feel the impact of rising global oil prices if geopolitical tensions persist.

Speaking at the 12th High-Level Conference on the International Monetary System organised by the International Monetary Fund and the Swiss National Bank in Zurich, he said the government has so far shielded consumers from the full impact of rising crude prices. However, this protection may not last indefinitely.

"But if this is to continue for a longer period of time, it's already, you know, about 75 days... I believe that the government, it's, you know, it's a matter of time that the government will actually pass on some of these price increases," he said.

How has the government managed fuel prices so far?

Despite a sharp rise in global crude oil prices, the government has largely kept petrol and diesel prices stable. This has been achieved by absorbing costs through reduced duties and limiting price increases in certain controlled fuels like gas.

Malhotra noted that the government has "absorbed a significant part of the burden by keeping pump prices of petrol and diesel unchanged, reducing duties and allowing only marginal increases in some controlled prices such as gas."

However, this approach has limits, especially if elevated crude prices persist due to ongoing geopolitical disruptions.

Why is the current situation not sustainable?

The core issue is the prolonged nature of the global shock. The West Asia crisis has already stretched beyond two months, pushing up international crude prices and increasing India’s import bill.

Malhotra made it clear that if disruptions continue, the government may have no choice but to pass on costs to consumers, leading to higher fuel prices and potentially broader inflation.

This creates a delicate balancing act between protecting consumers in the short term and maintaining fiscal discipline over the long term.

What does this mean for inflation and monetary policy?

The RBI Governor stressed that while monetary policy plays a key role in stabilising inflation, it cannot fully offset supply-side shocks like rising oil prices.

He explained that monetary frameworks help "anchor inflation expectations," but also acknowledged their limitations in dealing with external disruptions.

Malhotra emphasised that central banks must prioritise stability over precision during uncertain times. He said policymakers should focus on "robustness and caution instead of pursuing extremely precise policy responses during periods of heightened uncertainty."

He further highlighted the importance of "gradualism, policy communication and central bank independence" in maintaining credibility and managing inflation expectations.

How vulnerable is India to global supply shocks?

India remains particularly exposed to external shocks, especially those originating in West Asia. A significant portion of the country’s trade and energy needs is tied to the region.

Malhotra pointed out that one-sixth of India’s imports and exports are linked to West Asia. Additionally, around 40 per cent of remittances, 40 per cent of fertiliser imports, and nearly 60 per cent of gas supplies come from the region.

This deep economic linkage makes India highly sensitive to geopolitical developments there.

Why does food inflation remain a major concern?

Another structural challenge is the high share of food in India’s inflation basket. Even after revisions, food accounts for nearly 40 per cent of the Consumer Price Index.

Malhotra noted that while temporary supply shocks can sometimes be ignored, policymakers must act if inflation begins to spread more broadly across the economy.

He cautioned that intervention becomes necessary when "second-round effects begin spreading across the broader economy and inflationary pressures become generalized."

How is India managing its fiscal position?

Despite these challenges, the RBI Governor highlighted the government’s progress on fiscal discipline. India has reduced its fiscal deficit significantly from pandemic highs.

He said the deficit has come down from 9.2 per cent of GDP during the COVID-19 period to around 4.3 per cent, reflecting a continued focus on fiscal consolidation.

This fiscal prudence gives the government some room to manage shocks, but prolonged subsidies on fuel could strain finances.

What lies ahead for policy and consumers?

The road ahead depends heavily on how long the West Asia crisis continues and how global crude prices behave.

Malhotra concluded that monetary policy must remain "highly flexible, agile and nimble" to respond to rapidly evolving global and domestic conditions.

For consumers, this means fuel prices may remain stable in the short term, but a gradual increase becomes more likely if global disruptions persist.

(With inputs from ANI)