Rupee Clouds Monsoon Silver Lining on India Inflation
The rupee’s plunge to a record threatens to dash the Reserve Bank of India’s hope that monsoon rains will boost farm output and help ease the fastest inflation among the world’s largest emerging markets.
India’s consumer-price index rose 9.64 percent in July, official data showed yesterday, compared with 6.3 percent in Brazil, 6.5 percent in Russia and 2.7 percent in China. The interbank overnight call money rate closed at 10.25 percent yesterday, the highest since March 2012, after the central bank tightened cash-supply to support the currency.
Governor Duvvuri Subbarao said July 30 the monsoon is a “silver lining” as the slumping rupee kept him from adding to three cuts in the benchmark repurchase rate this year. The agriculture ministry forecasts that the grain harvest may climb to a record. The July-September rainy season, the main source of irrigation for India’s 235 million farmers, had its best start since 1994, according to the weather office.
“The stark rupee depreciation has pulled the plug on the monetary-easing cycle,” Radhika Rao, an economist at DBS Bank Ltd. in Singapore, said in a phone interview. “Global oil prices and local food-supply disruptions mean there’s unlikely to be a significant pullback in retail inflation.”
Rao predicts India’s CPI will quicken to 9.8 percent this month. Gains in wholesale prices, the RBI’s benchmark inflation gauge, accelerated to 5 percent last month from 4.86 percent in June, according to the median of 34 economists in a Bloomberg survey before data due tomorrow.
The RBI last month lowered its growth forecast for Asia’s third-largest economy to 5.5 percent from 5.7 percent for the year ending March 2014 and said that, assuming a normal distribution of monsoon rains, it will try to ensure a 5 percent WPI inflation rate at the end of the fiscal year.
Analysts estimate that a 10 percent rupee depreciation boosts inflation by one percentage point, Raghuram Rajan, the finance ministry’s top adviser who will take over as RBI chief when Subbarao’s term ends next month, said June 20. The currency has fallen 10.5 percent in 2013, Asia’s second-worst performance.
Depreciation fuels inflation in a country that imports about 80 percent of its oil, and DBS Bank’s Rao says an unchecked decline could compel the monetary authority to raise lenders’ cash-reserve ratios and even its key repurchase rate.
Brent crude prices have risen 6.7 percent since the end of June as a political upheaval in Egypt heightened concern that unrest in the most populous Arab nation will spread, disrupting regional oil supplies. Energy costs contribute about 15 percent to India’s wholesale-price index and 9.5 percent to consumer prices. Food comprises 24 percent of the WPI basket.
In an attempt to steady the currency, the RBI last week added to measures to restrict cash supply. The central bank will sell 220 billion rupees ($3.6 billion) of cash-management bills each week, it said on Aug. 8, supplementing steps taken in July to cap lenders’ access to funds through daily repurchase auctions, tighter daily cash-reserve ratio balances and higher emergency funding costs.
“In the classic growth-inflation tradeoff, the angle of a sharply depreciating rupee has made currency management an imperative,” Sandesh Kirkire, who oversees 377 billion rupees of assets as chief executive officer at Kotak Mahindra Asset Management Co. in Mumbai, said in an Aug. 8 e-mail interview. “A more robust and coordinated policy response is needed to address the problem.”
The rupee, which touched a record low of 61.8050 per dollar on Aug. 6, weakened 0.3 percent to 61.4250 today, according to prices from local banks compiled by Bloomberg. The yield on the benchmark 10-year government bonds rose four basis points, or 0.04 percentage point, to 8.34 percent.
Gains in wholesale prices are likely to stay around 4.5 percent to 5 percent as supply and demand are “evenly matched,” according to Glen Levine, a senior economist at Moody’s Analytics.
“The economy is still growing well below potential, but supply is limited, especially of food, which supports prices,” Sydney-based Levine wrote in an Aug. 8 research report. “Rising agricultural yields will cool food inflation towards the end of 2013.”
Output of monsoon-sown grains in India may climb to a record this year, Tariq Anwar, the junior agriculture minister, told reporters in New Delhi July 30.
Bond risk in India has risen. Government-controlled State Bank of India (SBIN)’s credit-default swaps insuring the lenders’ bonds against non-payment for five years have climbed 96 basis points from this year’s low of 174 on May 17, according to data provider CMA.
The rupee is among five “fragile” emerging-market currencies partly due to relatively high inflation, according to Morgan Stanley. Price pressures will necessitate further depreciation to prevent an erosion of external competitiveness, the investment firm said in an Aug. 5 report. The Brazilian real, Indonesian rupiah, Turkish lira and the South African rand are the other four.
Global funds cut holdings of Indian debt by $8.4 billion since the start of June, worsening the currency’s decline, on concern the U.S. will pare stimulus that fueled demand for emerging-market assets. The weak rupee leaves India vulnerable to a current-account deficit, which official data show widened to an unprecedented 4.8 percent of gross domestic product in the last fiscal year.
“India has fallen victim to a perfect storm,” Nicholas Spiro, managing director at consulting firm Spiro Sovereign Strategy in London, said in an Aug. 11 research note. The nation is “caught in a vicious circle in which severe balance of payments weaknesses, ineffective measures to shore up the tumbling rupee, a sharp decline in growth and persistent foreign outflows from its local currency debt market are all feeding on each other,” he wrote.
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