Rupee to Spur India Inflation as China Industries Slow: Economy

Rupee Stokes Inflation; China Manufacturing Slows
A sustained slide in the rupee may buck the RBI’s plan to keep borrowing costs unchanged in coming months, limiting its scope to respond to growth threats posed by Europe’s debt crisis. Photographer: Sanjit Das/Bloomberg

The Indian rupee’s slump to its weakest level since at least 1973 risks boosting inflation and spurring higher interest rates just as a manufacturing slowdown eases price pressures in neighboring China.

The rupee traded at 52.19 per dollar at 2:38 p.m. in Mumbai, bringing its decline in the past four months to 15 percent, the biggest drop among 10 Asian currencies tracked by Bloomberg. Reserve Bank of India Deputy Governor Subir Gokarn said in Mumbai the drop will have an “immediate impact” on the country’s inflation, which is the fastest among BRIC nations.

“The more the rupee drops, the more difficult it would be for the central bank to stay pat on rates,” said Arun Singh, Mumbai-based senior economist at Dun & Bradstreet Information Services India Pvt. “There will be pressure on the RBI to abandon its stance and do another hike.”

India’s challenge leaves it diverging from China, where a private survey today indicated manufacturing is at its weakest since March 2009. A moderation in prices would give Chinese policy makers greater flexibility to respond to the impact of Europe’s debt crisis, with the RBI’s scope limited.

Bank of America Merrill Lynch yesterday lowered its projection for Chinese inflation in 2012 by a percentage point, to 3.5 percent, saying that the central bank may lower banks’ reserve requirement ratio by 1.5 percentage points next year.

Singapore Inflation

Singapore reported today an annual inflation rate of 5.4 percent for October, down from 5.5 percent the previous month, while exceeding the median forecast of 5.2 percent in a Bloomberg News survey of economists.

Malaysia’s consumer price index rose 3.4 percent last month after climbing at the same pace in September, according to a report by the nation’s statistics department today.

In China, a preliminary estimate of a manufacturing purchasing managers’ index released by HSBC Holdings Plc and Markit Economics slid to 48 from 51 in October. A reading below 50 indicates a contraction.

“Growth is set to overtake inflation as Beijing policy makers’ top policy concern,” said Qu Hongbin, a Hong Kong-based economist for HSBC.

The Shanghai Composite Index fell 0.7 percent today. The MSCI Asia Pacific Index of shares slid 1.5 percent. Tokyo’s financial markets were closed for a holiday.

U.S. Spending

In the U.S., a government report may show that consumer spending rose for the fourth straight month in October, while weekly jobless claims rose and orders for durable goods slipped, separate surveys indicated.

While a weaker rupee may aid exports, India may be less inclined to join Sri Lanka and Nigeria in letting exchange rates fall, given the risk of increasing import costs at companies such as Indian Oil Corp.

The currency touched 52.73 per dollar yesterday, the lowest level since data began in 1973, the year when major currencies began to float against each other after the abandonment of fixed exchange rates.

Infosys Ltd. sees “no bottom” for the rupee unless the central bank steps in, V. Balakrishnan chief financial officer at India’s second-largest software exporter, said in an interview with Bloomberg UTV yesterday. The volatility and uncertainties are “impacting the momentum of business,” he said.

Indian Prices

India’s benchmark wholesale-price inflation was 9.73 percent in October. By comparison, consumer prices rose 7 percent in Brazil, 5.5 percent in China and 7.2 percent in Russia in the same month.

The escalating cost of living in India triggered nationwide protests earlier this year, undermining Prime Minister Manmohan Singh’s government.

Inflation is a “regressive tax” that hurts the poor the most in a country like India where food is a “large share” in the consumption basket, RBI Governor Duvvuri Subbarao said in the southern Indian city of Hyderabad yesterday. Food inflation has averaged 10.3 percent this year. The World Bank estimates more than three-quarters of the people in India live on less than $2 a day.

“The direct role of monetary policy in combating food price pressures is limited, but in the face of sustained high food inflation, monetary action may still be warranted to anchor inflation expectations,” Subbarao said.

RBI Rates

The Reserve Bank has increased its repurchase rate by 375 basis points in 13 moves since mid-March 2010. The monetary tightening will moderate the economic expansion and help ease inflation, the central bank said Oct. 25. It cut India’s growth forecast to 7.6 percent from 8 percent for the fiscal year ending March 31, and reiterated benchmark wholesale-price inflation would slow to 7 percent by March 31.

The rupee is expected to reverse its losses once the European crisis is resolved as its slide has been driven by “global dynamics,” Subbarao said yesterday. The Reserve Bank will manage the volatility, he said, declining to comment whether the central bank is intervening in the currency.

The rupee’s decline is due to global uncertainty and any central bank action may not help, Finance Minister Pranab Mukherjee said in New Delhi yesterday.

India’s imports amount to the equivalent of 22 percent of gross domestic product, according to the central bank, and a weaker rupee increases the risk of inflation.

Indian Oil, the nation’s biggest refiner, raised local gasoline prices on Nov. 4 for the third time in six months to stem losses, saying the rupee’s decline boosted costs.

“The sharp drop in the rupee is clearly complicating the RBI’s anti-inflationary stance,” said Radhika Rao, an economist at Forecast Pte in Singapore. “The decline could be unwinding the tightening measures that they have taken. Any move to tighten rates will have a negative impact.”

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