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Context: The current price rise in Indian economy is largely driven by the non-core elements in the retail consumption basket. The food element in the non-core is being driven up both by primary global supply shortages and the rise in the fuel cost of transporting food. The key, therefore, is the cost of fuel.
|Core inflation = Headline inflation – Non-core elements (food and fuel)|
India secured Russian crude oil in the face of sanctions, reportedly on offer at a discount of $20-30 per barrel. This raised hopes of inflation control without having to resort to monetary contraction.
But, the impact of discounts will take time to take effect.
Why cheap Russian crude oil is not helping bring down cost of fuel?
A Bloomberg article authored by Serene Cheong and Debjit Chakraborty identifies the problem as the following:
– The way Indian oil refineries source crude oil—by a call for tenders from trader intermediaries, few enough in number to form oligarchies which collude on prices.
The deep discounts on Russian crude are reportedly being pocketed by those traders, while refineries continue to pay what might at best be a marginally discounted price.
There exists an oligarchic hold of intermediaries in the global market for oil. Global markets for primary commodities are characterized by powerful price-maker intermediaries.
Both headline and core will benefit enormously if India can manage to secure those large discounts on Russian crude.
Source: This post is based on the article “Inflation and what to do about it: Secure cheap Russian oil at least” published in Livemint on 5th May 22.