RBI sees inflation anchored despite energy shock

India’s Middle East-linked energy shock has not yet become a broad inflation problem at home, the Reserve Bank of India (RBI) said in its June bulletin (pdf).

Inflation print: Consumer price index inflation rose to 3.9% y-o-y in May, up from 3.5% in April, but remained below the RBI’s 4% target. The pass-through to domestic prices has been limited so far, although higher fuel and input costs could show up in consumer prices in the coming months, the central bank suggests.

Why it matters: India’s inflation is still below the RBI’s target, giving the central bank room to keep rates on hold for now. But that cushion depends on how fuel prices, commodity markets, and the monsoon move from here.

Monsoon watch: The RBI notes that deficient rainfall could weigh on farm output and rural demand, even as foodgrain stocks remain above buffer norms. If Middle East tensions stay contained, the monsoon could become the next major risk to the economy, QuantEco Research economist Vivek Kumar told Bloomberg.

Petrol and diesel prices have risen by 7.4% and 8.4% since May, adding an estimated 36 bps to headline inflation. Higher energy prices are also showing up in commercial LPG, industrial raw materials, chemicals, and rubber and plastic products, which could feed into consumer prices.

Policy read: The RBI’s Monetary Policy Committee held the repo rate at 5.25% at its June meeting and retained a neutral stance.

India’s private sector kept expanding in June, but the pace slowed as demand softened and companies flagged rising fuel prices, gas shortages, and competition as drags on new work, according to preliminary data from the HSBC Flash India Purchasing Managers’ Index (PMI) (pdf).

“Private sector activity eased a bit in June. Growth of manufacturing output softened a tad as inventory-building lost steam after a few hectic months. New export orders remained resilient and the order-to-inventory ratio ticked up, pointing at resilient manufacturing activity down the line. Input costs across the private sector rose, but at the slowest pace in five months,” HSBC Chief India Economist Pranjul Bhandari said.

By the numbers: The services business activity index fell to 57.3 from 59.8, marking a 17-month low. The manufacturing PMI slipped to 54.5 from 55, a three-month low.

Energy spillover: Fuel prices and gas shortages are showing up as business constraints. Cost pressure eased for a third straight month, but companies still reported higher chemical, food, fuel, gas, metal, and utility costs.