Moneycontrol Pro Panorama | Rupee’s tantrums throw fresh challenges to MPC

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.  On Tuesday, the RBI reshuffled the portfolios of three remaining deputy governors of the central bank after the term of Michael Patra, who oversaw the monetary policy department, expired yesterday. Patra's exit shortly after that of former governor Shaktikanta Das, marks the end of an era at the RBI -- an era characterised by unrelenting vigil against inflation. In other words, two major anti-inflation voices within the MPC have exited the scene.

The stance of new members will be clear in the February review. Post Patra’s exit, the crucial monetary policy department will be handled by Deputy Governor M Rajeshwar Rao. This is a typical exercise in RBI which always has four deputy governors. When Patra’s replacement joins, the RBI will once again reshuffle the portfolios.

Meanwhile, for the newly constituted MPC, the free-falling rupee presents a significant challenge. This is because a depreciating rupee increases the cost of imports, leading to imported inflation. As Aditi Gupta, Economist at Bank of Baroda, says in this story, sectors heavily dependent on imported raw materials are likely to witness escalation in costs due to higher input prices, impacting margins. This can also translate into higher prices for consumers, which will put a strain on spending and consumption.

To be sure, India’s retail inflation has been on the downward path for the past few months due to easing food inflation. The CPI inflation declined to a four-month low of 5.22 percent in December as compared to 5.48 percent in the previous month. The rupee has lost big this year against the US dollar and fell past the 86-mark even as the central bank defended the rupee. The widely expected rate cut in the February policy may be put on hold if the rupee continues to decline as lower interest rates could result in capital flight further weakening the currency.