Falling Rupee Weakens Fight On Inflation.

NEW DELHI: Currency fluctuations could be the new wild card in India's food inflation as it becomes more expensive to import inputs such as crude oil and fertilizers and staples such as cooking oil and pulses. The rupee has depreciated 3% in the past six days and 5% in this calendar year. India is the world's largest importer of pulses, cooking oil and fertilizers, leaving it more vulnerable to currency risk.

The 3% depreciation in the rupee will raise India's cost of crude oil imports by $11.5 million a day if prices remain unchanged. It also means an increase of Rs 700 per tonne in the price of yellow peas, which make up half of India's total pulses imports, traders said.

Fertilizer firms too will need to shell out Rs 1,400 per tonne more for Di-Ammonium Phosphate (DAP), 50% of which is imported. "The last thing we need at this point is imported inflation through this route. Our imports are inelastic. So currency depreciations effects us much more than any expected gain on earning from exports," says Dr Biswajeet Dhar, director general of Research and Information Systems for Developing Countries, a think-tank on trade issues . Rupee fell to a 15-month low on Tuesday.

More expensive energy and hydrocarbons will eventually feed into other parts of the food value chain. "We are dependent on imported energy and there will eventually be pressure to raise diesel and fertilizer prices. It is very difficult to tame inflation," said Dr Ramesh Chand, director of National Centre for Agricultural Economics and Policy Research , the government's apex body for farm economy research.

The weaker rupee is a double whammy for commodity companies already grappling with volatile global prices because it alters their cost calculations. Take pulses. "A Panamax ship carrying 50,000 t yellow peas from Canada would last week be worth $20 million. At today's exchange rate, it costs $3 million more. It is not a small number even if banks are ready to finance it," said the managing director of a large multinational trading company that is also among the top suppliers of pulses to India.

"You can expect local yellow pea prices to rise by at least Rs 1/kg to factor this increase ," he added. Yellow peas are the cheapest pulses available to Indian consumers, selling for below Rs 20 a kilo, and also made available through ration shops. Fertilizer companies too will face a higher bill.

"Importers that contracted DAP at $677/t were able to sell it to farmers for Rs 15,100/t and still earn a gross margin. Now they will have to shell out extra Rs 1,400/t despite no change in contracted price," said the head of a trading company here. India imports 20 million tonne of finished fertilizers annually in addition to raw material .

At least 2 million tonne of DAP is expected to be shipped in over the next six months. What complicates matters is that fear of fall in demand and competition may not allow all players to pass on this extra cost to consumers . "Fertilizer companies have announced their new DAP prices on September 1.

It will be hard for them to change MRP so quickly. That means they may have to re-work gross margins. Hedging currency risk also costs money," said an industry watcher.

"The industry will not be asking the government for any increase in subsidy because we are expected to deal with such fluctuations ourselves under the Nutrient-Based Subsidy scheme. There will also be no pressure on retail prices. Because we are an import-dependent industry, several companies hedge their currency risk. If the pressure continues to remain high till next year, then we shall see," said Satish Chandar, director general of Fertilisers Association of India.

Source : economictimes.indiatimes.com