Upside risk to prices as West Asia simmers: RBI

MUMBAI: Reserve Bank of India said the outlook for prices has shifted due to upside risks, even as data shows sustained resilience of the Indian economy, and warned that a prolonged war would be detrimental to the broader global outlook.

According to the State of the Economy report, there was a "drastic deterioration" in the global environment towards the end of Feb. It said geopolitical tensions in West Asia intensified into a major conflict causing disruption to key oil infrastructure and energy corridors due to the closure of Strait of Hormuz. It quoted the International Energy Agency as calling it "the largest supply disruption in the history of the global oil market".

The report said global commodity markets came under pressure due to disruptions across crude oil, natural gas, and fertilisers. "Brent crude oil prices exhibited volatility with prices moving from $78 per barrel to $112.2 per barrel in March." It added that aluminium prices, which were already elevated, surged further amidst supply concerns, due to smelter closures and force majeure declarations by affected parties.

The report pointed out that the conflict triggered a transmission of shocks from energy markets to financial systems. It said, "Equity markets came under selling pressures in March with the decline more pronounced in energy-importing economies, particularly in Europe and Asia."

It observed that the conflict has triggered a broad-based sell-off across sectors, which led to a 'massive jump in the India Volatility Index in March'.

It said, "Emerging market currencies came under pressure amidst heightened risk aversion while the US dollar strengthened on safe-haven demand. The rupee has come under renewed pressures in March amidst FPI outflows. The West Asia conflict led to the firming up of yields on dated government securities."



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