WPI inflation may jump to 6% if rupee ends yr at 57: Crisil

Moneycontrol Bureau

Inflation may change its course if the rupee ends 2013-14 at 57 to a dollar, against our current expectations of 54 to a dollar. In this scenario wholesale price index (WPI) inflation could move up close to 6 percent, from our current forecast of 5.3 percent, said Crisil Research, the domestic arm of global rating agency S&P.

"The recent slide in the rupee to near 60 per dollar mark has raised eyebrows on all fronts. A sharp depreciation can adversely impact inflation. We believe that the current slide will be temporary and that the rupee will strengthen from current lows," it said in a research note.

CRISIL Research has revised its average WPI inflation forecast downwards to 5.3 per cent, from 6.3 per cent as estimated earlier. The downward revision is guided by steady and sharp decline in metal prices and weaker demand momentum than anticipated earlier.

Headline WPI inflation remained below the Reserve Bank of India’s (RBI) comfort zone of 5 percent for the second consecutive month in May. Manufactured inflation fell, driven by deflation in ferrous metals and very low levels of inflation in non-ferrous metals. This is also reflected in CRISIL core inflation indicator (CCII) (which excluding prices of ferrous and non-ferrous metals).

A sharp and fast-paced decline in demand, according to Crisil, has severely impaired the pricing power of corporate. Moreover, growth in rural wages - a significant driver of demand in recent years- has also begun to decelerate. The current slide in rupee however, has created upside risks to inflation.

"A weak rupee will impact the imported component of inflation, of which crude oil is a major component. Crude oil prices (Indian basket) are expected to average around $103 per barrel in 2013-14, down from last year’s average of $108 per barrel. Had the currency not depreciated sharply, rupee price of imported crude oil would now be falling compared to the same time last year," it said.