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India is planning to boost shipments to Russia by an additional $2 billion as the two nations work out a payment system in local currencies to continue bilateral trade amid sweeping international sanctions on Russia for invading Ukraine, people with the knowledge of the matter said.

To do this, Prime Minister Narendra Modi’s administration is in talks with Moscow to liberalize market access for several Indian-made products, the people said, asking not to be identified as the talks are private. This comes as the two governments work toward a proposal to settle trade in rupees and rubles and look for ways to balance the trade given that India is a net importer of Russian goods.

India is looking to export products supplied by countries who have halted shipments after U.S. and its allies imposed sanctions, they said.

On the list are pharmaceutical products, plastics, organic and inorganic chemicals, home furnishings, rice, beverages such as tea and coffee, milk products, and bovine products.

India has come under severe criticism for lifting imports of oil to take advantage of a dip in prices after U.S., Europe, Australia and Japan piled economic sanctions onto Russia in response to its war against Ukraine. President Joe Biden met with Modi on Monday and conveyed that the U.S. stands ready to help India diversify its energy imports, which would make it less reliant on Russia.

A Commerce Ministry spokesperson did not immediately respond to an email seeking comment.

An analysis by the trade department shows that India can easily scale up exports to Russia in the top 20 items it needs to imports. Marine products, textiles and apparel, footwear, machinery, and electronics are some of the other items India is seeking to send to Russia.

Currently, India’s exports to Russia stand at a miniscule $3 billion compared to the over $68 billion of shipments to the U.S. It could be higher but for steep logistics cost, sanitary rules, the language barrier and lower allocations in government procurement done by Russian state-run firms. Total bilateral trade between the two countries stood at $11.8 billion in the first 11 months starting April 2021, higher than $8.1 billion recorded for the previous full-year.

India has historically attempted a neutral stance on tensions between major powers, even as it has joined groups such as the Quad security alliance with Australia, Japan and the U.S.

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Domestic petrol and diesel rates are directly benchmarked against international crude oil prices, and with oil prices soaring in the last two months, state-owned fuel retailers needed a price hike just to break even.

Now, with petrol and diesel prices increasing by Rs 10 per litre over 14 revisions since March 22, sources told CNBC-TV18 that "sustained fuel price hikes may not be needed if crude prices stabilise at current levels".

According to the sources cited by the channel, the current domestic retail fuel prices are benchmarked to international crude oil at $95 per barrel. With the last week's Brent crude oil prices at not more than $100 per barrel, the sources indicated that domestic fuel prices could again be put on a freeze for some time.

At the same time, they also stated that oil marketing companies (OMCs) may still recover about a month's worth of losses.

"Approximately one month more of losses may still be recoverable by OMCs," said the sources.

According to the report, OMCs made gains till January end and the gains balanced out in February. It is further said that though discussions have been held about a central excise duty relief, a decision has not been taken yet.

It is said that Rs 5 per litre excise cut on petrol and diesel will cost Rs 70,000 crore revenue loss at this stage for the government.

The last time when the central government cut excise duty of Rs 5 a litre on petrol and Rs 10 a litre on diesel and many states also reduced state tax, there had been a freeze on fuel prices from November 3, 2021, to March 22, despite the spike in international crude oil prices.

The domestic rates of petrol and diesel have remained steady for the sixth day in a row on April 12.

On a daily basis, OMCs adjust the price of petrol and diesel depending on the average price of benchmark fuel in the worldwide market over the previous 15 days and foreign exchange rates. Every day at 6 am, any changes in petrol and diesel prices take effect.

Here is how petrol and diesel prices are calculated in India. Also, know how much of it is tax.

Also Read: RBI Governor Shaktikanta Das forecasts crude oil price will be at $100 per barrel in FY23

On March 24, Moody's Investors Service estimated that India's fuel retailers IOCL, BPCL and HPCL have together lost around $2.25 billion or Rs 19,000 crore in revenue in the November 2021 to March 2022 period after they kept petrol and diesel prices unchanged despite a sharp rise in crude oil prices.

JP Morgan in its report said for OMCs to revert to normalised marketing margins, retail prices need to increase by Rs 9 a litre or 10 percent.

At last week’s monetary review, the monetary policy committee (MPC) jolted the rate environment by resetting the policy priorities to inflation before growth, an oblique increase in the reverse repo rate, and an open field for future policy actions as befits a highly uncertain price environment.

None of this was anticipated. The punch was forceful and the bond market reacted to that as well as what had been expected, viz., forecast revisions that now see inflation 120-basis points higher at 5.7 percent in FY23, and real GDP slower by 60-basis points at 7.2 percent, and a modified stance “…to remain accommodative while focusing on withdrawal of accommodation to ensure that inflation remains within the target going forward, while supporting growth”.

The message was reinforced at the post-policy conference by the RBI Governor specifically underlining the raised inflationary risks and rearrangement of policy priorities. The bond market responded breathtakingly with the 10-year (6.54 percent) benchmark yield jumping 19-basis points to 7.12 percent, increasing more since this week.

Markets and analysts hadn’t expected any action despite the RBI’s communication in preceding weeks about forecast revisions in the April review owing to developments associated with the Russia-Ukraine war; or the government’s steady and daily pass-on to retail-level the prices of all fuels. They were focused upon what the MPC would signal about the future policy course and its normalisation. In part this was because of the past assurance that changes would be ‘well-telegraphed’ in advance. Partly, this was because beliefs about the tolerance of a higher-for-longer inflation by a pro-growth RBI in an environment of fiscal dominance had crept in.

All that is now past. Supply or demand, good or bad inflation, it figures prominently in the policy trade-off. This has been well-telegraphed although many may argue the gear shift, sudden as it is and the heavy-duty impact it has had upon markets and the environment, was anything but. The strangely-worded stance – remaining accommodative while focusing on withdrawal of accommodation – indicates conditions will be less ultra-easy, as elaborated at the post-policy conference.

RBI Deputy Governor Michael Patra said that the movement towards a positive real policy rate has begun, although it’s presently unclear what this might be, and adding that for India’s stage of development, this needs to be positive. As to the distance to positive real rate territory, this is uncertain; at best, speculation with plenty depending upon the evolution of commodity prices.

The central bank made it clear — in forward guidance as it were — that it is ‘ready to take whatever action is required’ and will act ‘as per the emerging situation’, and ‘will be nimble’. Entirely in line with the enlarged uncertainties embedded in the fan charts of RBI’s latest inflation projections, this indicates monetary actions are bespoke than smooth or pre-guided adjustments. It also fits into the multiple challenges posed by an exceptionally uncertain environment with diverse risks: geopolitical, the US monetary tightening, and QT in place of QE (quantitative tightening instead of easing), slowing world demand and possible recession, domestic inflation and slowing growth, the pressure of large government borrowings, among some. It allows balancing of possibly competing policy demands or claims at any point of time in the forthcoming months ahead.

This is also buttressed by the RBI’s fortification of its toolkit — it has substituted the reverse repo rate (this remains unadjusted but, on the instruments menu) with an uncollateralised standing deposit facility (SDF) as the LAF floor; at 3.75 percent, this restores the corridor to 50-basis points, the pre-pandemic level, and is an operative increase of 40-basis points to remove overnight liquidity.

Since monetary actions are conditional upon the inflation readings, this obviously puts the spotlight on the incoming data. In particular, the impact of the fuel prices’ pass-throughs, direct and indirect, will be cumulatively visible in the present quarter’s CPI inflation, where the projected central tendency is currently 6.3 percent.

If exceeded, could a policy rate hike follow on its heels? Or would a changeover to ‘neutral’ stance come first? The RBI has communicated in advance that if inflation surprises on the upside, it will act. No surprise there.

Renu Kohli is a New Delhi-based macroeconomist. Views are personal, and do not represent the stand of this publication.

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