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BW Businessworld

The Tipping Point

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In a sense, you might think of it as imported inflation. Despite the moderation in inflation numbers over the past few weeks — helped along by the Rs 2 cut in the price of petrol — the depreciation of the rupee's value against major currencies could undo whatever little joy that lower prices may have brought.

Not that artificially suppressing inflation helps; diesel and liquefied natural gas prices are still subsidised to a much greater degree. Lower petrol prices may help sentiment, but not much else. But the depreciation of the rupee is going to give the Reserve Bank of India another headache it could do without.








COSTLIER
VEGETABLES: 27.26 per cent
PULSES: 14.44 per cent
MILK: 10.74 per cent
EGGS, MEAT AND FISH: 11.73 per cent

CHEAPER
ONIONS: 22.89 per cent
PULSES: 14.44 per cent

*Price compared to September 2010

Depreciation means higher prices for imported goods, like oil and metals; there is really no way of controlling those prices. Capital goods imports, a key component for industrial growth, will get more expensive. As companies have already cut back on investment plans, that will lower output further and delay the recovery of growth momentum.

Lower capital goods imports imply lower short-term suppliers' credit and dollar trade credit from banks; that means lower capital flows, though reserves look relatively stable at over $300 billion. A recent media release by the ministry of finance suggested that banks were selling assets overseas. Bank capital inflows, usually $4 billion in a year have shot up to $16 billion.

The RBI will not intervene except to smooth out volatility; it makes no sense to use reserves to defend the rupee when future capital flows are uncertain. The exchange rate problem is an inflation problem in disguise.

(This story was published in Businessworld Issue Dated 28-11-2011)