The Reserve Bank of India (RBI) sees no major impact on domestic inflation if India reduces its purchases of oil from Russia amid threats of an unspecified ‘penalty’ and a substantial hike in the 25 per cent tariff rate slapped on the country by US President Donald Trump. Speaking to reporters on Wednesday at the conclusion of the Monetary Policy Committee’s (MPC) three-day meeting, RBI Governor Sanjay Malhotra said it was important to keep in mind that India did not buy oil only from Russia.
“It’s not only Russian oil that we are taking; we are taking oil from many other countries. If the mix changes, what is its impact on prices, what is the global commodity prices of crude, it will depend on all that. And the other thing it will depend on is how much of its impact, downwards or upwards, is actually taken by the government in the form of excise duties and other tariffs. So, we don’t see any major impact as of now because of this on inflation because I think the government will take an appropriate decision on the fiscal side in case there is any shock,” Malhotra said in the post-policy press conference.
Trump’s July 30 decision to slap a 25 per cent tariff on India along with an additional but unspecified “penalty” for its defence and energy imports from Russia — the first use of secondary tariffs — sent shockwaves around the world as the two countries continue to negotiate a bilateral trade agreement. The American President has since then doubled down on his threat, telling television channel CNBC on Tuesday that he was going to raise the tariff on India “very substantially over the next 24 hours”, a day after he posted that India was buying “massive” amounts of Russian oil and selling it on for “big profits”, on his social media platform Truth Social.
New Delhi, meanwhile, has called the targeting of India over the purchase of Russian oil “unjustified and unreasonable” and said these imports began as its traditional supplies were diverted to Europe, with the US having “actively encouraged such imports by India for strengthening global energy markets stability”.
At the time of Russia’s invasion of Ukraine in February 2022, the former’s share in India’s oil imports was under 2 per cent, with New Delhi relying heavily on the likes of Iraq and Saudi Arabia. Since then, Indian refiners have lapped up discounted Russian oil that was shunned by developed nations, resulting in its share in India’s oil imports jumping to 35-40 per cent.
According to the RBI’s most recent Monetary Policy Report, published in April, if crude oil prices are 10 per cent higher than the RBI’s baseline assumption of $70 per barrel for FY26, domestic inflation may be 30 basis points (bps) higher than the central bank’s forecast. On Wednesday, the RBI cut its full-year headline retail inflation forecast by 60 bps to 3.1 per cent.
Global uncertainties
Commenting on the impact of the current global trade uncertainties on inflation, Deputy Governor Poonam Gupta told reporters on Wednesday that nearly half of the country’s inflation basket consisted of food, whose price does not get impacted directly by global developments. “A significant part consists of non-tradables, which again does not get impacted by global developments. So, to that extent, a first-order direct impact of these evolving uncertainties on India’s inflation is likely to be very, very limited,” Gupta added.
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On the growth front, Malhotra said the RBI retained its forecast for the current fiscal at 6.5 per cent as there was not “sufficient data” to make any revisions. According to the governor, some of the global uncertainty was already factored in by the central bank when it cut the GDP growth forecast in April to 6.5 per cent from 6.7 per cent. “However, there is still a lot of uncertainty,” he added.
According to Sakshi Gupta, principal economist at HDFC Bank, GDP growth is seen inching down to 6.3 per cent this year from 6.5 per cent in FY25. “However, in the case where tariffs remain elevated at current levels and/or are further raised we see a downside risk of 20-25 bps to our GDP growth forecast for the year,” Gupta added.
When asked if the RBI, in addition to cutting interest rates, was prepared to support Indian business amid the current uncertain global trade scenario, Malhotra said the central bank had taken a number of measures to support growth, including on the regulatory and foreign exchange management norms front to make it easier for companies to do business and take part in international trade. “We will continue to do whatever is required to be done in such a scenario. Of course, trade negotiations are still continuing. We are hopeful that we will have an amicable solution,” the RBI governor said.
On Tuesday, the central bank said banks do not need to take its approval to open the so-called Special Rupee Vostro Accounts, which are used to settle international trade transactions in Indian rupees.
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