Rupee fall against dollar to fuel inflation further

The sharp fall in the Indian rupee since February is expected to push headline inflation to 7.3 per cent, thus reducing chances of a rate cut, the Centre for Monitoring Indian Economy (CMIE) has cautioned.

Following the continuous depreciation of the rupee, CMIE has raised its financial year-end inflation target to 7.3 per cent from the 6.7 per cent and that of the Reserve Bank of India's (RBI) goal of 6.5 per cent.

"Such a scenario reduces the possibility of a cut in interest rates anytime soon and hence, we can't ease interest rates before the second half of the fiscal," it said.

CMIE expects the rates to remain stable in FY13 as compared to the steep rise in the previous fiscal.

However, CMIE has asked RBI to opt for a cash reserve ratio cut to make the interest rate transmission to borrowers more effective.


According to economists, the weakening of the rupee will lead to a hike in the price of imported goods such as edible oils, crude and coal, which will impart a cost push effect to inflation.

Some experts say they believe the rupee could further slide to 60 but CMIE has forecast the currency will stay between 55 and 56 till the first half of July, after which the capital inflow situation will decide its fate.

According to CMIE, consumer inflation will continue to remain at elevated levels due to rising food prices.

"We expect CPI inflation for industrial workers to rise by 8.1 per cent in 2012-13. It was 8.5 per cent in 2011-12," it said.

CMIE, in a report on the economy, said the government is unlikely meet its target of containing fiscal deficit at Rs 5.1 lakh crore, or 5.1 per cent of GDP. The fiscal deficit could rise to 5.4 per cent on higher-than-estimated subsidy burden.

As against the government's objective to cap subsidies of Rs 1.9 lakh crore, CMIE expects the delay in diesel and petroleum products deregulation will push it up to Rs 2.3 lakh crore.

Courtesy: Mail Today