Moneycontrol
Dec 08, 2016 09:13 AM IST | Source: Moneycontrol.com

Inflation down, but oil & rupee could be spoilers

The Reserve Bank of India (RBI) on Wednesday retained its March-end retail inflation forecast of 5 percent, but high oil prices and rising interest rates could have push up domestic prices.


The Reserve Bank of India (RBI) on Wednesday retained its March-end retail inflation forecast of 5 percent, but high oil prices and rising interest rates could have push up domestic prices.


India’s inflation rates have remained well within the RBI’s tolerable threshold limit of 6 percent. It was 4.20 percent in October.


The six-member Monetary Policy Committee (MPC) headed by RBI Governor Urjit Patel, however, is of the view low headline inflation rates could be masking rising prices protein and services costs.


“The Committee took note of the upturn in the prices of several items that is masked by the easing of inflation on base effects during October,” the RBI statement said.


The currency recall has forced families to spend less, depressing the demand for some goods including perishable products in November, but prices of wheat, gram and sugar have been firming up.


“While discretionary spending on goods and services in the CPI (retail inflation) excluding food and fuel – constituting 16 percent of the CPI basket – could have been affected by restricted access to cash, the prices of these items may weather these transitory effects as they are normally revised according to pre-set cycles,” the RBI said.


The RBI is of the view that prices of housing, fuel and light, health, transport and communication, pan, tobacco and intoxicants, and education — together accounting for 38 percent of India’s retail inflation basket — may remain largely unaffected by demonetisation.


“With the OPEC’s agreement to cut production, crude prices may firm up in the coming months,” the RBI said in its latest monetary policy review.


While food prices are expected to remain within the manageable range on fresh arrival of seasonal vegetables, fuel prices could start rising from January after the Organisation of Petroleum Exporting Countries (OPEC) — a cartel of oil producers — agreed to cut back production from the beginning of 2017.


Higher crude oil prices can potentially lead to higher diesel and petrol pumpgate prices in India.


This, in turn, could fan the overall inflation rates, limiting the RBI’s ability to cut interests further.


The RBI is also keeping a close tab on developments in the US financial markets and its impact on the rupee.


“Global developments, especially as financial markets factor in the future stance of US monetary and fiscal policy, could impart volatility to the exchange rate thereby feeding into inflation,” the RBI said.


The US Federal Reserve will meet next week amid speculation that it would raise interest rates aided by strong revival signs in the world’s largest economy.


Higher interest rates will make the US markets more attractive for foreign investors.


This could prompt funds to move funds quickly from emerging markets such as India to the US in expectation of higher returns in the months to follow.


This could knock down the rupee, making the RBI hesitant to cut interest rates to maintain India’s attractiveness as a favoured debt market for foreign funds.


The rupee has been persistently flirting with its record low levels, with analysts forecasting that it could breach the 69-70 dollar mark in the coming months.

A weaker rupee can make most imported goods — from gadgets to crude oil — costlier.

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