A past RBI study had shown that a 5% depreciation in the rupee could push inflation higher by roughly 20 basis points and vice versa. One basis point is 0.01%.
Now, with the likelihood of the rupee moving upward of 80 per dollar, and given India’s large oil and gold import bills, imported inflation would be on the ascent. India, the world’s second-largest importer of gold, produces only 1% of consumption locally.
“The RBI’s view that the rupee is fairly valued lowers the need for a hawkish response to the currency’s movements for now. The rate trajectory will continue to track inflation closely, and any sign of a renewed upward move in energy, as well as food commodity prices, are likely to trigger more aggressive rate action,” DBS Bank economist Radhika Rao told ET.
RBI raised policy rates by 90 bps since May with the central bank economists batting for front-loading of rates as the inflationary pressure has become generalised instead of transitory. The net impact of lower price and the higher exchange rate would matter, said Madan Sabnavis, chief economist at
.
“RBI’s inflation forecast would definitely be reviewed continuously. I would tend to think that their forecasts on inflation would have buffered an exchange rate for the rest of the year. As the RBI has the power to guide the pace of depreciation, a large part of this would have been taken into account,” he said.
The silver lining, to be sure, is the recent easing of commodity prices from their peaks. “The recent correction in the food and energy commodity complex will provide a breather with a lag, even as the softer currency narrows the net benefit,” DBS’s Rao said.
“The worst of inflation has passed by and prices per se though high are not ominous. This means that while rate hikes will continue they need not be aggressive this time,” said Sabnavis.
Inflation, measured by the consumer price index, eased to 7.01% in June and at 7.04% in May as compared with 7.79% in April, is still markedly above RBI’s upper tolerance band of 6%.
RBI in its June policy projected inflation at 6.7% for FY23, with the first quarter projection at 7.5%, followed by 7.4%, 6.2% and 5.8% in the next three quarters.
Empirical evidence shows that inflation above 6% in India is unambiguously harmful for growth, and uncontrolled inflation causes exchange rate depreciation, discourages capital inflows and triggers large capital outflows, RBI deputy governor MD Patra had said at the last monetary policy meeting.
