Exchange Rate Volatility May Import Inflation.

The volatility in the exchange rate is increasing the risk of imported inflation. “Rupee has depreciated by about 11 per cent against US dollar during 2011-12 so far. India’s imports account for about 22 per cent of GDP and depreciation of the rupee raises the risk of imported inflation,” RBI said in the second quarter review of the Macroeconomic and Monetary Developments.

Chief economist at rating and research agency at Crisil DK Joshi said, “Rupee will continue to remain vulnerable. It is very obvious from the document that RBI will not protect any level of the rupee and the RBI seems to be asking the domestic companies to hedge their exposures.”

“Depreciation of rupee emerges as a new source of price pressures. Upside risks to inflation path could result from exchange rate pass through of recent rupee depreciation and incomplete transmission of earlier rise in global commodity prices,” RBI said.

Rupee has seen significant nominal and real depreciation in the second quarter of 2011-12. However, this trend has been in line with that of other emerging market currencies, which too depreciated significantly as the US dollar appreciated with flight to safety amidst rising risk aversion.

“Volatility had affected domestic equity and currency markets, but were contained by providing adequate rupee and forex liquidity. Rupee depreciation and fall in equity indices in second quarter were comparable with the patterns in most other emerging markets,” RBI said.

Source : mydigitalfc.com