Lower inflation weakens rupee: study

Moderation in inflation led to higher pick up in economic activity, which in turn weakened the rupee against the greenback, according to a study.

The Assocham Eco Pulse Study, tracking the movement of wholesale price index (WPI) inflation for the last four months, found that the moderation in inflation was coupled with vibrant economic activity, which led to higher imports and consequently more demand for dollar.

The study found that WPI inflation fell from 5.78% in the fist week of January to 4.83% in the third week of February and during this time, rupee depreciated as the import dollar led demand went up.

Noting that rupee was trading at 43.68 againt a dollar and touched a low of 43.96 in the last week of January, the study said it started gaining only in the third of February when inflation started moving up again.

The March and April data also showed similar relationship between inflation and rupee-dollar value.

"It is thus safe to infer from the trend that a moderate inflation leads to pick up in the economic activity which in turn increases the demand for dollar triggered by buoyancy in imports," the study said.

After spiralling in the first eight months of 2004-05, largely because of supply side pressures, inflation started receding since the end of 2004, it said attributing to fall in the prices of vegetables, cotton and oil sees. Besides, various policies helped in arresting the price rise, it said.