The fall in rupee value may not put additional pressure on already-high inflation and interest rates, unless the Indian currency reaches Rs 70 level versus the US dollar, global banking major Credit Suisse has said.
In a research note on falling rupee, Credit Suisse said that a massive depreciation of 16 per cent in the Indian currency since the end of July has raised concerns about further surge in inflation and interest rate levels.
Noting that it was tempting to suggest that the fall in the currency would have disastrous effect on wholesale price inflation, it said “we very much doubt it. While the rupee has softened sharply so have most international commodity prices.”
It dismissed the popular notion that the falling rupee would push higher the inflation, already in the double-digit numbers for more than eighteen months now, by raising the cost of imported goods.
“The Indian rupee would need to reach 70 against the US dollar to prevent commodity price inflation from falling further,” Credit Suisse said.
Credit Suisse said that the headline inflation will drop to 6.5 per cent by March, lower than the Reserve Bank of India’s projection of 7 per cent.
The Indian rupee is the fourth most depreciated currency in the world and the most depreciated in the Asian continent.
Earlier this week, the rupee had hit an all-time low of Rs 52.73 against the US dollar, as investors exited from riskier emerging markets as well as eurozone assets, and made their bet on dollar — which is seen as a “safe heaven” at times of crisis.
Though there has been some recovery in the last two days, but it is still below the 52-level.
A weaker rupee is a matter of concern for India as it depends on imports for over 70 per cent of its oil and gas requirements and the depreciation of the local currency has made imports more expensive.
Credit Suisse believes that the weaker rupee can be expected to add more than two percentage points to inflation, assuming everything else is “unchanged“.
“Crucially, however, everything else is not unchanged. In particular, US dollar-denominated commodity prices have been falling” Credit Suisse said.
The report further notes that the rupee-denominated commodity price inflation has already halved from 40 per cent to 20 per cent and will drop to 3 per cent by March 2012 — the end of the current fiscal year.
“Although the relationship with the overall WPI index is not perfect it is not bad and very clearly suggests that the risks to the headline WPI rate is on the downside,” the report added.