Country’s import bill goes up too.
By R. Chandrasekaran
CHENNAI: The sharp fall in the Indian currency has had its unfavorable effect on inflation in July, which rose more than expected, thus providing fresh headache to the policy makers, who are announcing various measures to protect the rupee from a further slide.
The government data indicated that wholesale price index-based inflation advanced to 5.79 percent in July from 4.86 percent in June. However, compared to the last year July inflation data of 7.52 percent, the current fiscal year inflation has eased. But the easing would have been much more if not for the significant fall in the Indian currency during the last two-three months.
While the rise in inflation was expected, analysts surveyed by various media indicated inflation expectation of around 5 percent for July. The government has also revised May inflation to 4.58 percent from 4.7 percent disclosed earlier by the Commerce and Industry ministry.
The weak Indian currency has pushed up India’s import bill, especially on oil, thus pushing raw materials costs higher resulting in food prices growth. This could be seen from the index for food articles that grew 3.4 percent, whereas non-food articles index rose 0.9 percent only.
The government release also disclosed that the fuel and power index increased 3 percent on account of higher prices of furnace oil, petrol and aviation turbine fuel.
Normally, any rise in inflation will invoke a call for increasing the interest rates. However, in the current conditions, the government and the Reserve Bank of India (RBI) have been taking steps to defend the rupee. In the process, the central bank has tightened the money policy, while the government wanted import consumption to be reduced.
The inflation data comes on the heels of India’s factory output contracting 2.2 percent in June providing Indian corporate with arms to call for easing of money policy to stimulate growth.
The RBI and the government will find it difficult to tame the inflation if the trend continues in August and September since hiking interest rates will badly impact the already sluggish economy.
To contact the author, email to rchandrasekaran@americanbazaaronline.com