Rupee emerges as upside risk to inflation

The recent slide in the rupee to near 60 per dollar mark has raised concerns on all fronts.

A sharp depreciation can adversely impact inflation as it would push up the cost of imports and more importantly fuel prices. The rupee has lost 6.5% since the start of May, one of the worst performance among Asian currencies.

"A weak rupee will impact the imported component of inflation, of which crude oil is a major component," analysts at Crisil Ressearch said. Though crude oil prices of the Indian basket is expected to average $103 per barrel in 2013-14, down from an average of $108 per barrel last year, the weak rupee would eat away the gains.

"Had the currency not depreciated sharply, rupee price of imported crude oil would now be falling compared to the same time last year," Crisil Research said.

Sustained rupee depreciation will also increase under-recoveries, the difference in the market price of crude oil and the retail price of petroleum products, on administrative fuels such as diesel, kerosene and LPG.

Rupee depreciation will put further pressure on hiking fuel prices, especially those of diesel, to contain subsidies within budgeted estimates. If the rupee continues to stay at its current lows, fuel inflation rather than falling, will edge up closer to 9%, the same as last year. Fuel inflation eased to 7.3% from 8.8% in the previous month, driven by a fall in prices of coal and petrol in May 2013, relative to May 2012.

The country imports many other intermediate goods. As the rupee weakens, the imported cost of manufacturing will go up. If demand begins to recover, companies, which are hit by shrinking profit margins, would pass on some of the burden to consumers, analysts said.

"If rupee continues to remain at current levels, we expect Crisil Core Inflation Indicator (CCII) to breach 4.5% from the current estimate of around 4%," the ratings agency said.

Crisil Research revised its average WPI (wholesale price index) inflation forecast downwards to 5.3%, from 6.3% as estimated earlier. The downward revision is guided by a steady and sharp decline in metal prices and weaker demand momentum. "The current slide in rupee however, has created upside risks to inflation," Crisil said.



Keywords:dollar mark, fuel prices, Asian currencies, rupee, market price, crude oil , petroleum products, diesel, kerosene, LPG, fuel prices, coal , petrol, Crisil Core Inflation Indicator ,CCII, WPI,wholesale price index,Business news