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Economists expect RBI rate hike in Oct; petrol demand moderation unlikely

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Economists expect RBI rate hike in Oct; petrol demand moderation unlikely

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The Russia-Ukraine war has led to a sharp spike in crude prices, with Brent currently trading at USD 130 per barrel. To understand what its ensuing impact would be on Indian macros, CNBC-TV18 spoke to Rathin Roy, Managing Director, Overseas Development Institute, and Samiran Chakraborty, Chief Economist, Citi.

The Russia-Ukraine war has led to a sharp spike in crude prices, with Brent currently trading at USD 130 per barrel. To understand what its ensuing impact would be on Indian macros, CNBC-TV18 spoke to Rathin Roy, Managing Director, Overseas Development Institute, and Samiran Chakraborty, Chief Economist, Citi.

Roy affirmed that India’s growth is dependent on consumption and consumption demand is already low. Highlighting the demand aspect for petrol, he explained that it’s unlikely that there will be any moderation in demand. However, he mentioned that India’s fiscal numbers could tighten based on the measures taken on petrol. He added that demand for petroleum generally tends to be inelastic.
He said,  “The economy has been doing very badly for the last many years before COVID and during COVID obviously. So, consumption demand is already low. Demand for petroleum, it is true, tends to be inelastic and therefore, you are unlikely to see any moderation in demand.”
He added, “Regrettably Indian growth is based on the consumption of the top 150 million. To that extent, it is bad; but the heat on the common man will come in three ways, it will not come so much in the form of fuel and to the extent that it may happen, that can be alleviated through direct benefit transfers. It will come most emphatically on the knock-on effect it will have on fertiliser. Because changing our fertiliser mix is going to take time, I expect to see a fairly sharp rise in fertiliser prices.”
On sunflower oil which are exported from the war-torn regions of Russia and Ukraine, he said that there’s a need to watch the market carefully.
Roy said, "The second risk is manageable, but is there - which is that Ukraine and Russia are among the largest producers of wheat and soya oil. India is a net exporter of wheat, so on the wheat side, we should gain if we manage our exports smartly. On sunflower oil, which we do import from them, we have some tough choices to make there, and we will have to watch that market rather carefully for India; the rest of Asia will be far worse hit.”
Chakraborty concurs with Roy on fertiliser prices and believes there’s a risk of prices rising as India imports potash. He believes higher fertiliser subsidy, excise duty cuts could impact revenue projections of the government. There’s also some areas of immediate concern on expenditure, he shared.
He said, "There are actually two areas which are immediate concerns on the expenditure front. One is that if we have to reduce the excise duty on petroleum products, then in a very crude way, Rs 10 excise duty cut is about 0.6 percent of GDP hit on the fiscal."
"The other thing is that there was a hope that the fertiliser prices will be lower this year and that is why the fertiliser subsidy was cut almost 25 percent in the Budget estimate for FY23. But now with risks of fertiliser prices globally going up, not just because of gas prices being higher, but also the fact that we import a lot of potash from Russia, and we will probably not be able to do it in these circumstances; potash prices have gone up," he added.
"So all that could mean that the fertiliser subsidy bill could be significantly higher from where the Budget estimates were. So both the excise duty cut and the fertiliser subsidy could take up much of that space that was there from our conservative revenue estimate perspective," he explained.
Chakroborty believes it is a futile exercise trying to control inflation by hiking rates. He said that he will keep an eye on generalised inflation and expects the Reserve Bank of India (RBI) to hike rates in October. According to him, RBI could go through with the price rise unless it starts becoming generalised.
Watch the video for the full interview.
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