7/29/2019 Article on Impact of Rupee Depreciation on Wpi

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The current increase in price levels is on account of depreciating rupee.The WPI inflation in June

reversed the declining trend observed since February 2013 rising to 4.86 per cent on account of spurt in

food prices and pass through in fuel prices due to impact of rupee depreciation.

The food article prices especially prices of vegetables witnessed a sharp spike owing to seasonal factors.

The price of vegetables increased by 16.47% in June 2013, relative to 4.85% in May 2013. The overallfood articles inflation was 9.74% in June 2013, the corresponding number last month was 8.25% and ayear back was 10.91%.

Food inflation rose to 9.74 per cent in June from 8.25 per cent in the previous month.

Food inflation was mainly fuelled by spurt in prices of vegetables (16.47 per cent), onions (114 per cent),rice (19.11 per cent) and cereals (17.18 per cent).

The surprise element in todays WPI inflation was that most of the import sensitive items within the WPIbasket eased sequentially despite sharp depreciation of rupee.

The sharp fall in the rupee may contribute to a pickup in imported inflation.

A sharp jump in prices of food articles led to marginal pick up in the WPI inflation in Jun'13. However,

impact of a 10% fall in rupee is yet to be factored in WPI inflation in coming months. Nevertheless, due

to weak pricing power of the manufactures, the impact of rupee depreciation is likely to be ~30-50bps on

the overall WPI inflation. We expect RBI to maintain status quo in the Jul'13 policy.

Core inflation continues to soften. Despite a sharp fall in the rupee, nonfood manufactured inflation in

Jun'13 further eased to a 42-month low of 2%, down from 2.4% in May'13. This partly reflects a sharp

reduction in pricing power of the manufacturers.

"The need of the hour is to boost investor sentiment.

The sudden rise in inflation comes against the backdrop of falling exports, a wobbly currency and sliding

industrial output growth.

However, implications of the recent rupee depreciation are likely to take effect over the core WPI

inflation over the next few months, implying that the comfort out of the lower demand scenario could

erode. We see the RBI maintaining status quo at the July 30 meeting with the likelihood of an extended

pause through fiscal year 2014 having risen significantly,

With a weak currency, imported costs of production go up and eventually businesses might have to passthem on to the consumers," rating agency Crisil said in a note.

"These developments seriously challenge RBI's aggressive year-end target of 5% WPI inflation. If therupee averages Rs 58 per $ in 2013-14, WPI inflation could rise to 6% as compared to our baseline call of5.3%. No action from the RBI may be the best action in this situation. Expect no rate cut on July 30," itsaid.