A weakening rupee, on the back of sticky wholesale price and retail inflation, will complicate the task of both the government and the Reserve Bank of India and may prompt the monetary policy committee (MPC) to go for another round of aggressive rate hike of 50 basis points or more, when it meets next week.
At the same time, fears of elevated import costs may force the fiscal authority to further initiate measures to ease supply-side bottlenecks in the domestic market to control price pressure. Any review of the hike in export duties on certain steel products and iron ore, and the ban on wheat and broken rice exports is unlikely to materialise anytime soon, despite industry demand.
Economists that FE spoke to said the depreciating rupee will also proportionately offset the benign impact of the recent easing in prices of certain commodities like oil and metals globally. The fears of “imported inflation” have intensified now, as purchases of commodities ranging from crude oil, edible oil, coal and fertilisers to finished products like electronics and capital goods from overseas are set to turn more expensive. High coal import costs may also feed into electricity rates.
The rupee hit a fresh trough of 81.09 against the dollar on Friday, having lost 124 paise against the American currency in the last three sessions, as aggressive rate hikes by the US Federal Reserve and escalating geopolitical tension in Ukraine bridled risk appetite. Since the currency has breached the psychological 80-per-dollar barrier, it may fall further and find some support at 81.5 or 82, some analysts said.
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The pass-through of elevated input rates to output price is set to last longer than anticipated. Oil-marketing companies, which haven’t passed on the entire cost to consumers yet, are unlikely to cut petrol and diesel rates in sync with the drop in global crude oil prices, to recoup losses, the economists said.
Devendra Kumar Pant, chief economist at India Ratings, said while most commodity prices globally have declined from their peaks, they are still elevated and are higher than the year-ago levels. A weak rupee further aggravates this situation. “Even with flat year-on-year growth in the dollar prices, currency weakness (in India) will add to inflation (compared with a year before),” Pant said.
DK Joshi, chief economist at Crisil, said: “Weakening of the rupee, if sustained, will raise the imported component of inflation by partly offsetting some of the gains from the recent decline in crude and commodity prices. (However) A transitory episode of the rupee weakening is unlikely to have any noticeable impact on inflation.”
Retail inflation reversed a three-month declining trend and rose to 7% in August, from 6.71% in the previous month.
Aurodeep Nandi, India economist at Nomura, said, “Typically, a 5% depreciation of the rupee has an inflationary impact of around 20 basis points, so it somewhat adds to upside risks to inflation, although we do not think it stands to materially disrupt the current trajectory. We expect CPI inflation to average 6.8% in FY23 (against 5.5% in FY22).”
Yes Bank chief economist Indranil Pan said the good thing now is that commodity prices globally have come down due to recession fears (else inflation fears would have been even higher). “Further, there are moderations to the food inflation and some indications are seen with respect to supply chains easing,” he said. Pan conceded that there is still a long way to go for the full unwind to happen and for inflation to come down globally. “In India, the government has also stepped in strongly to help the RBI in its fight to contain inflation. We continue to expect inflation at an average of 6.7% for FY23 (against 5.5% in FY22),” he added.