The rupee’s free fall may reverse the moderating trend in inflation and it could again head back to the 6-7% range in the months ahead. Economists said the sliding rupee has nearly wiped out the expected gains from soft global crude and commodity prices. Food prices, which have remained stubborn so far, may again rise due to an expected increase in fuel prices. As most of the food items are transported by road and train, any increase in diesel prices has a cascading impact on food prices.
“The impact on inflation will depend on how long the rupee’s weakness persists. If it persists for long, inflation could be 6% by the year-end,” said D K Joshi, chief economist at credit rating agency Crisil.
Moderating inflation has ushered in huge relief for policymakers reeling under the weight of high prices but a sudden reversal in the situation may create fresh policy headaches. The return of higher inflation at a time of crucial state elections and national polls in 2014 is also likely to put more pressure on policymakers to ease the burden.
The wholesale price inflation had eased to 4.7% in May, lower than the previous month’s 4.89%. The sharp volatility has also ruled out any interest rate cut by RBI. Economists said a 1% depreciation in rupee adds 15 basis points to WPI inflation. But at a time when the economy is in a slowdown phase and demand is low a 10% depreciation might add about 70-odd basis points.
Pressure on food prices has returned if the trend in vegetable prices is taken into account. While short supply gaps have been attributed to the sudden spike in tomato prices, any persisting food price pressure will add to inflationary expectations.
Retail inflation has hovered above the 9% mark for the past few months and the central bank has flagged the stubborn inflationary pressures in the economy as a risk factor. Economists said the combination of food and fuel prices could stoke inflationary pressures in months ahead and make it tougher for policy options.