CMIE says inflation to move up on rupee fall

The continuing depreciation of the rupee is expected to fuel inflation and push the headline number to 7.3 per cent for FY13, making a reduction in interest rates for borrowers unlikely in the near term, an economic think-tank has said.

The Centre for Monitoring Indian Economy (CMIE) has upped its fiscal-end inflation target to 7.3 percent from the 6.7 per cent and Reserve Bank’s 6.5 percent, due to the slide in the rupee.

“Driven by the rupee depreciation, headline inflation is expected to go up to 7.3 per cent in FY13 from our previous forecast of 6.7 per cent,” the CMIE said in a briefing.

 

Such a scenario reduces the possibility of a cut in interest rates anytime soon and hence, we cannot have easing in interest rates before the second half of the fiscal, it said.

“A CRR cut would be more effective (in transmission),” the agency recommended to the RBI.

In its mid-quarter policy review last week, RBI sounded hawkish, going back to its inflation management role after giving signals of easing due to the sharp dent in growth in its earlier policy announcements.

The rupee has been one of the worst performing currencies at present, having lost nearly 30 per cent since last August due to a variety of reasons like fall in capital flows on concerns over the current account deficit.

It touched an all time low of 57.37 to the dollar during trading last Friday.