Energy price shocks may slow down economic recovery but inflation to remain stable: Report
New Delhi, June 4
Surging energy costs and weak capital inflows may slow down economic recovery, fuelling inflation pressures, says a research report by ICICI Bank. Unlike other Asian countries, India is running on a domestic-driven capex cycle, with a below-normal monsoon forecast and higher fuel prices; food inflation risks are rising alongside broader input-cost pass-throughs. However, core inflation is expected to remain relatively stable.
As per ICICI Bank Global Markets report, inflation is speedily increasing, majorly led by food which now should also be driven by energy prices. However, "core inflation is far more stable."
The report noted, "core inflation excluding ornaments is still benign at around 2.1%. But most of this is the past. Eventually, producers would pass higher input costs to consumers. This is visible in rising menu costs (restaurant and accommodation) as well as other household goods and personal goods."
While the Reserve Bank of India (RBI) revised its inflation forecast in April to 4.6 per cent for FY27 and FY28 respectively, as per ICICI Bank, it is "very likely that this gets revised to around 5% for FY27 which leaves real rates of 0.25%."
The report further noted that the apex bank also "gave a core inflation estimate of 4.4%" which will likely "move higher to 4.5% in FY27." Thus, "most of the increase in headline inflation is because of volatile food and energy items."
Countries profiting from AI boom are better placed to withstand the energy price jolts. "Global economic narrative is currently driven by artificial intelligence boom which is pushing growth higher across countries participating in the technology supply chain. While the technology boom is positive for global growth and investments, higher energy prices are a drag on growth." the report notedNoting that "energy prices have softened a tad over the last few days," the report said "prices have settled at much higher levels than where they were pre-conflict (USD 68/bbl in 2025)." Hence many global central banks will likely increase the interest rates in coming meetings with markets anticipating a rate hike by the US Fed as well.
"Many central banks are also raising rates to protect currencies from depreciating further. A shift in narrative can change the trajectory, but it looks like it may not happen soon enough and thus higher rates are inevitable," the report said.
"For aligning inflation with target, monetary policy should do its work. For capital inflows, the focus should be on attracting inflows. At present, inflows are moving to AI theme and thus may take a while to reverse which is setting expectation of currency depreciation. Hence, communication of RBI's strategy to bridge the BoP deficit should align expectations with underlying macroeconomic reality," it said.
— ANI
Reader Comments
Interesting point about AI boom helping some countries. India needs to get into that tech supply chain more seriously. Otherwise we'll just keep getting hit by energy price shocks while others ride the wave.
It's concerning that many central banks are hiking rates. India's domestic capex cycle is strong, but if global rates go up, capital inflows could dry up further. RBI needs to communicate a clear strategy for the BoP deficit as the report says.
The report mentions menu costs rising - yeh toh hum sab dekh rahe hain. Restaurant bills have gone up 20% in last year. But if core inflation is only 2.1%, maybe it's just food and fuel creating the noise. Still, common man is feeling the pinch.
One thing I appreciate is the ICICI report being realistic about rates - saying higher rates are inevitable. Many analysts keep dreaming of rate cuts, but with energy at $68/bbl vs pre-conflict levels, we're not out of the woods yet.
My concern is that even though core inflation is stable at 2.1%, the report admits this is 'past'. Producer cost pass-through is happening in restaurants and household goods. By year end, core might not be so stable. Hope government keeps tabs on input costs.
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