Import inflation remains a challenge before the Reserve Bank of India’s Monetary Policy Committee through a depreciating rupee, although many analysts are banking on a rate cut in February’s policy along with subdued retail inflation.
The rupee had hit a record low of 86.59 against the US dollar earlier this week and is expected to cross the 87 level by the middle of this year, if not earlier. Officials in New Delhi are said to be concerned over the depreciation of the rupee on crude oil imports, as well as the glut of imported commodities, including food items such as pulses and edible oil.
“The depreciation of the rupee has been positive for exports but will make imports more expensive,” an official source said.
Analysts also point out that in theory, the depreciation of the rupee and the recent rise in global crude oil prices could increase core inflation. According to Nomura’s estimates, every 5% decline adds about 0.26 percentage points to headline inflation and about 0.1 percentage points to core inflation.
Retail inflation fell to a four-month low of 5.22% in December and food prices saw some modest cooling. The MPC, chaired by new RBI Governor Sanjay Malhotra, is scheduled to meet between February 5 and 7 and analysts expect a 25 basis point cut in the repo rate against the backdrop of subdued retail inflation and growth to 6.4% this fiscal. expect .
“Currency weakness has distorted policy trade. We expect the RBI to follow a more orthodox flexible inflation-targeting monetary policy framework. If inflation is close to target despite currency weakness, and growth is below trend, we “Hence our call for a 25 basis point repo rate cut in February,” Nomura said in a recent note. Accumulation expects a 100 basis points cut in rates.
However, in a note earlier this month, Standard Chartered said it has pushed back its call for a 50 basis point cut in repo rates from February-April to April-June. It also revised down its 2025 USD-INR forecast, citing increased external-sector volatility, evidence of the Reserve Bank of India’s (RBI’s) higher tolerance for a stronger USD, and a tighter banking-system. Liquidity “We revise our USD-INR forecasts to 86.25 (84.50) by March 2025, 86.75 (85.0) by June, 87.25 (85.25) by September and 87.75 (85.50) by the end of 2025,” it said.
