Energy Crisis: Crude and Coal can give double blow to the country; Can increase inflation, can hinder growth

Posted on 6th Oct 2021 by rohit kumar

The rise in the price of crude oil in the international market and the shortage of coal in the country can put a hindrance in the path of rapid economic growth by increasing inflation. These things are very important because the policy meeting of the Reserve Bank of India (RBI) is going to be held this week, where the speculation of increasing interest rates was being made for the last few days.

 

Factories can stop the shortage of coal

 

About 70% of the electricity in the country is generated from coal and about 85% is imported from crude. Shortage of coal can shut down factories, which is a problem. In such a situation, the import of crude oil may increase. That too, when its price in the international market is running at a seven-year high and is putting pressure on the economy.

 

Heavy pressure on currency and bond markets

 

The currency and bond markets have been under heavy pressure due to inflation and the prospect of widening trade deficit due to both fuels (crude oil and coal) events. The rupee has been the weakest in Asian currency this month, which fell 0.2% to 74.60 against the dollar on Wednesday. The 10-year bond yield on Tuesday touched an all-time high of 6.28% since April 2020.

 

'Both incidents are an economic setback for the country'

 

Sonal Verma, Chief Economist – India, and Asia, Nomura Holdings Inc. says, “Both the incidents are an economic blow to the country. Due to them, inflation may increase, economic growth may be reduced and trade deficit may increase along with budget deficit. As inflationary pressure continues to rise, demand starts coming down.

 

Core inflation expected to remain at 6%

 

According to Deutsche Bank, retail inflation is currently in the RBI's comfort zone (4% to 2% above or below) i.e. in the range of 2% to 6%. But core inflation is expected to remain near 6% for at least the next six months. Core inflation does not include inflation in food and fuel at risk of high volatility.

 

RBI may keep the repo rate the same

 

It will be challenging for RBI to handle inflation due to supply disruption. To boost growth, it wants to keep the key lending rate (repo rate) at a record low. Developing countries like Russia and Brazil have increased the repo rates to control inflation. But according to a Bloomberg survey conducted on economists, the Reserve Bank may keep the repo rate the same on Friday.

 

RBI's stance on inflation and cash will be monitored

 

Bond traders will be on the lookout for what the Reserve Bank gives on the upside in global commodity markets, inflation, and liquidity in the system. They have started adjusting their trading strategy according to the prospects of the RBI slowing down bond-buying for policy normalization and liquidity withdrawals from the market.

 

The reverse repo rate may be increased to 3.50%

 

According to Citigroup, the reverse repo rate (the rate at which banks can deposit access funds with the RBI) can be increased by 15 basis points to 3.50%. Madhavi Arora, Lead Economist, Emkay Global Financial Services, says, “Due to the energy crisis and rising interest rates abroad, foreign investors may have started demanding higher risk premium in emerging markets. This poses a risk of a fall here.