Falling rupee may contribute to inflation woes

After losing around 7.2 per cent against the dollar, compared to the three-year high levels in August, the falling rupee may play spoilsport to the central bank’s efforts to control inflation. The Reserve Bank of India (RBI), in its mid-quarter review of monetary policy 2011-12, on Friday said the depreciating rupee may have adverse implications for inflation.

Tracking the global sentiment, the rupee fell to a near two-year low of around 48 against the dollar on Wednesday. “India continues to run a current account deficit worth three per cent of GDP (gross domestic product), and its reliance on external flows makes the exchange rate somewhat more vulnerable than its East Asian counterparts that run persistent surpluses,” said Deutsche Bank economists Taimur Baig and Kaushik Das. The rupee on Friday closed at 47.27 against the dollar, compared with yesterday’s close of 47.55.

In the last one and a half years, RBI has raised policy rates 12 times to tame inflation and reduce inflationary expectations. The central bank said this rate increase would reinforce the impact of past ones on inflation, which remains persistently high.

High commodity prices the world over have added to inflationary pressures in India. Besides paying more for the same commodity, Indian importers now need to spend more local currency to buy the strengthening dollar. This rise in cost is likely to be passed on to customers.

Effective on Friday, Indian oil companies raised petrol prices by Rs 3.14 per litre. RBI said this would have a direct impact of seven basis points to wholesale price index-based inflation, along with an indirect impact with a lag. Though global oil prices have moderated, the pass-through to domestic prices remains incomplete.

“The import content of inflationary and growth pressures from the West made monetary policy transmission ineffective and inefficient. The dollar liquidity squeeze also added to currency woes and the diluted price transmission in money market rates,” said Moses Hardings, head (global markets), IndusInd Bank.

Wholesale price index-based inflation in India rose from 9.2 per cent in July to 9.8 per cent in August, owing to high food and fuel prices. Inflation for non-food manufactured products, or core inflation, rose from 7.5 per cent in July to 7.7 per cent in August, suggesting persistent demand pressures. RBI said it estimates March-end inflation at seven per cent.