|Inflation versus rupee|
|Thursday, 15 December 2011 00:00|
Fixing the second is integral to fighting the first
On the face of things, the persistence of inflation—it was 9.1% in November versus 9.7% in October and 10% in September (all data is for year-on-year)—may weaken RBI’s resolve to cut rates on Friday, though the chances of that happening were
always low, given it is a mid-quarter review and there are no expectation surveys to guide RBI either. Inflation has fallen the most—from 11% in October to 8.5% in November—for food articles, but this still remains high. But look at the data carefully, and the rupee’s role in keeping inflation high comes out quite clearly. Basic metals, which have an 11% weight in the WPI, saw prices rise 13% in November, but rose by 10-11% steadily since June. Look at the CRB metals index, however, and you see that the global index, which was 906 in November 2010, is at 868 today—after peaking at 1,084 in February, it has been falling, though there have been some months of a small increase. Fuel and power have been falling since peaking in April in the CRB but have continued to rise in the WPI—but that’s due to the fact that it is only now that prices are being raised, indeed for electricity and diesel/kerosene/LPG, there is still a significant subsidy element. In other words, if RBI wants to keep inflation under control, it has to start devising ways to at least slow down the fall in the rupee.
The falling rupee, finance minister Pranab Mukherjee has already said in Parliament, is one of the major reasons for the R1 lakh crore hike in the subsidy bill. In the case of corporate India, the years of low currency volatility persuaded firms to rapidly hike foreign borrowings. For the top 10 borrowers from abroad, ECBs total around R1,15,000 crore—total ECBs for all firms total to around R4,50,000 crore. A 20% fall in the rupee’s value over the year means a serious dent in India Inc’s bottomline in terms of both annual interest costs as well as in terms of mark-to-market losses—this applies, naturally, to just the unhedged part of foreign borrowings but experts point out this is a very large sum. India’s story, which had begun to unravel for some time now, looks more shaky. It is in this context that the government had talked of FDI in retail, to improve foreign investor sentiment. While RBI will do what it needs to do in terms of increasing forex flows by raising caps for FIIs in bond markets and opening a separate window for the oil company purchases of dollars, $10-11bn each month, the larger sentiment depends upon the government’s actions. So far, it has been a losing battle—if Tuesday’s deferment of the Food Security Bill that would have raised subsidies by a third was a good sign, the fact that the Cabinet will meet on Sunday to clear it gives quite another impression.