RBI Flags Biofuel Production for High Edible Oil Prices
Indonesia’s B50 mandate may tighten supplies and raise India’s cooking oil import bill
Mumbai: The Reserve Bank of India (RBI) in its July Bulletin has attributed widespread rise in edible oil prices to the growing diversion of edible oil use in production of biofuel. A footnote in the Bulletin cited Indonesia’s increase in its palm oil biodiesel blending mandate from B40 to B50.
“Edible oil prices continued to show a broad-based increase amidst use of edible oils for biofuel production,” said the RBI July Bulletin in an article State of the Economy.
Fresh supply-side price pressures have lately emerged, owing to a likely production slump in Indonesia and Malaysia, the key exporters of these items to India. Indonesia has rolled out B 50 biofuel programme from July 1, a blend of 50 per cent palm oil based biodiesel and 50 per cent diesel amid rising global oil prices due to the West Asia conflict.
According to experts over 30 per cent of Indonesia’s palm oil output may eventually be diverted to the biofuel sector, reducing the surplus available for exports. For India, which imports 57 per cent of its cooking oil requirements, these developments are leading to higher cooking oil prices, impacting trade and current account.
Says Madhavi Arora, lead economist at Emkay Global, “The RBI is right to flag the growing biofuel diversion as one of the structural drivers of edible oil inflation. Indonesia's move towards higher palm oil biodiesel blending increases domestic consumption and tightens exportable surplus, which matters significantly for India as one of the world's largest palm oil importers. However, this is only one part of the story.”
“Edible oil prices have also been influenced by weather-related supply uncertainties across major oilseed producers, geopolitical disruptions that lifted crude oil prices and improved biodiesel economics, and changes in import duties that have affected domestic price transmission. Going forward, if Indonesia sustains higher blending mandates while global crude prices remain elevated, edible oil prices could remain firm despite an otherwise benign food inflation backdrop.”
She suggests the need to diversify import sources and accelerate domestic oilseed production to reduce vulnerability to global supply shocks.
Edible oil price increase matters for retail inflation because edible oils account for 2.18 percent of the consumer price index basket. Within this, refined oil and mustard oil have the largest weights, at 1.05 percent and 0.96 percent, respectively.
The central bank noted that so far, up to July 20, the prices of key food items recorded broad-based sequential increases. While rice and wheat prices firmed up and the pace of increase in pulses moderated, edible oil prices “continued to show a broad-based increase amidst use of edible oils for biofuel production”.
Headline CPI for June came in at 4.38 per cent YoY from May’s print of 3.9 per cent YoY crossing the RBI mandate for the first time since January 2025.
