While the ultimate impact of rupee depreciation on the economy will depend on what happens to the dollar price in relation to the international commodity market, the economy’s medium-term trajectory on the inflation front is going to be at six per cent level in the next fiscal, according to C Rangarajan, chairman, Prime Minister’s Economic Advisory Council.
“Any depreciation (of rupee value) will have an impact on import prices. Obviously, important commodities such as oil in rupee terms will cost more as a consequence. But the ultimate impact on the economy will also depend upon what happens to the dollar price with regard to these commodities,” he said here at the Institute for Development and Research in Banking Technology, on Monday.
There is a possibility that if the world economy does not grow strongly, then perhaps the international commodity prices could also come down. Therefore, one will have to take into effect the impact of growth on the international commodity prices and also what happens as a consequence of depreciation to know the final impact, according to him.
“But it is very difficult at this point to say what the exact impact on inflation will be,” he said responding to questions by the media.
“On the whole, we have to move towards a situation where inflation starts to decline. Our own estimate is that inflation will start declining from this month onwards. We will see a significant change in the first three months of the next calendar year. As a consequence, we could get to the seven per cent level by March 2012,” he said.
On whether the Reserve Bank of India’s aim of reaching five per cent inflation level was possible in the medium-term, he said: “I think we should aim at five per cent in the medium-term. My own reading is by March 2012, it will come down to seven per cent and perhaps we can see further easing of inflation in the next fiscal. Of course, good monsoon has to be around. Certainly, we can move towards six per cent level next year.”
Explaining the change in inflationary trend, he said food inflation was coming down as the monsoon had been good and was expected to be carried further. Referring to a 60 per cent jump in vegetable prices in January because of the unseasonal rains this year, he said, “We do not expect a repeat of that. With the moderation in vegetable prices in those three months, the food inflation will definitely show signs of decline.” Food inflation had eased to 9.01 per cent last week from 10.63 per cent in the previous week. The same was 11.81 per cent in the last week of October.
While it is inappropriate to curtail demand arising from increase in incomes, it is also necessary to ensure that the supply side is augmented, he said on a question directed at RBI governor’s recent comments on the role of subsidies and National Rural Employment Guarantee Act in fuelling inflation. “Obviously as the governor of RBI he was referring to some factors contributing to increase on the demand side inflation,” he said.
He also said the fiscal deficit levels this year might be higher than generally predicted as commodity prices remained high due to which underrecoveries also remained high necessitating to provide additional subsidies to oil companies.
“I had mentioned a month ago it is going to be very difficult to achieve the fiscal deficit target of 4.5 per cent (of the GDP). I believe that it is tough,” Rangarajan pointed out.