Re Hits New Low at 53.71/$; Fall May Stoke Imported Inflation.

The upward pressure on inflation is likely to intensify as the rupee on Wednesday touched a new all-time low of 53.71/72 against the dollar, amid continuing capital outflows and further appreciation of the US currency against its major rivals like the euro.

Even as the rupee came close to 54 level at 53.88 at one point and inflation came down to 9.11 per cent for November, experts said the falling rupee is likely to fuel imported inflation, thus making it difficult for the Reserve Bank of India (RBI) to tone down the monetary policy and bring down interest rates.

The depreciation of the rupee will push up the imported component of inflation, at least temporarily, rating agency Crisil said. Continued weakness in the currency is pushing up the cost of imports (edible oil, fuels and metals). For example, while the global crude oil prices rose by nearly 20 per cent in November 2011 compared to a year earlier, the rupee price of oil shot up by around 40 per cent due to currency depreciation. The fall in rupee is also responsible for an upward revision in CRISIL Research’s average inflation forecast to 9.2 per cent in 2011-12, from 9.1 per cent estimated earlier.

Deteriorating Indian fundamentals have added to the worries about the Indian rupee. “Below-trend GDP growth in Q2-FY’12 (July-Sep 2011) and a poor start to Q3-FY’12 — October IIP was similar to the levels seen in early 2009 — confirm India’s economic slowdown. While November IIP may rebound on better economic data, the elimination of volatile components and more working days, it is unlikely to provide a reason to cheer. Indeed, with subdued industrial activity and a lagged negative effect on the services sector, GDP growth may fall below 6.5 per cent YoY in the coming quarters,” said a Standard Chartered Bank analyst.

The market is looking to the RBI policy meeting on December 16 to support investment, as the scope for fiscal measures is limited. While a cut in the repo rate, which currently is at 8.5 per cent, is not expected, there is some hope of lowering the cash reserve ratio from its current level of 6 per cent.

The liquidity deficit in the banking system of Rs 88,000 crore, well above the RBI’s comfort level of Rs 60,000 crore, has increased such expectations. “However, with WPI inflation still at elevated levels and the previous rate hikes still feeding through to the real economy, we believe that the RBI will be in no hurry to signal a change in stance this week. In terms of supporting banking-system liquidity, we expect the RBI to continue with its open market operations. Any rate cuts will thus have to wait until Q2-2012 when WPI inflation cools to 6.5-7 per cent,” Stanchart said.

Source : indianexpress.com