Falling rupee may prompt RBI to revise inflation estimate upwards

Further cuts in key policy rates looks difficult in 2013-14

Economists are in the process of revising their Wholesale Price Index (WPI) inflation estimates upwards  for 2013-14 and are of the view that the Reserve Bank of India (RBI) may also do so in a scenario when the rupee has been depreciating against the dollar. The street also believes that further cuts in key policy rates looks difficult in this fiscal.

 

Since the start of this fiscal the rupee has already weakened significantly and experts see it weakening further in the time ahead. The recent strengthening in the Indian currency against the greenback is considered temporary by them. RBI governor D Subbarao said today in Indore that it was difficult to say how long the external problems affecting the rupee would persist. 

 

Subbarao also said that inflation remains high. According to him curbing inflation remained RBI's most important task. He added that RBI has been able to curtail inflation to some extent in the last two years. 

 

“The fall of the rupee by nearly 12 per cent since the beginning of May 2013 has raised the rupee price of crude oil and will get reflected in higher inflation of internationally-linked fuels such as petrol. The rupee’s weakness has also increased under-recoveries in diesel to Rs 10 per litre (as of July 8) from only Rs 2.50 per litre in April. If the rupee remains at current levels, the monthly diesel price hike will have to continue throughout 2013-14,” said Dharmakirti Joshi, chief economist, CRISIL in a note to clients. 

 

According to Joshi in addition, keeping in mind the fiscal consolidation agenda, the pressure to hike prices of other administered fuels such as LPG will also rise. Input costs, particularly those of imported raw materials, have risen significantly. As firms pass-through at least some of these cost increases to consumers, core inflation - measured by CRISIL Core Inflation Indicator – will begin to rise again. 

 

RBI in its monetary policy statement for 2013-14 said in May 3 that WPI inflation is expected to be range-bound around 5.5 per cent during 2013-14. The policy documents also said that RBI will endeavour to condition the evolution of inflation to a level of 5 per cent by March 2014.

 

But according to economists the RBI's projection for WPI may be revised upwards soon. “Upward revision of WPI numbers from RBI is on cards. Whether they will do it immediately or after monsoon assessment, that depends,” said Rupa Rege Nitsure, chief economist, Bank of Baroda. Nitsure's projection for WPI inflation for 2013-14 is a tad above 6 per cent. Earlier she was expecting it to be 5.3 per cent.

 

WPI inflation fell to 4.7 per cent in May from 4.9 per cent in April. The data for June is due next week and according to Shubhada Rao, chief economist, YES Bank, it will rise to 5.1 per cent driven by sharp upward movement in prices of primary articles. Rao also revised her 2013-14 WPI estimate upward to 6 per cent from 5.75 per cent earlier.