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After remaining in the negative zone for several months, imported inflation or cost of imports is slowly edging up since the beginning of the fiscal.
Contribution of imported inflation in headline the consumer price index (CPI) inflation has increased by 0.5 percentage points since April this year, an analysis by the central bank showed. But strong FPI inflows and RBI’s currency management could help rein in the value of the rupee which in turn will help rein in such inflation.
Of the 3.7 percent CPI headline inflation in August, 3.5 percent was on account of domestic factors, while the balance was due to imported factors. ” The contribution of imported components to headline inflation turned positive from April 2024 and increased gradually to 0.5 percentage points by August 2024″ the Reserve Bank said in its latest monetary policy report. Significantly, the contribution of imported inflation to overall CPI inflation was negative since December 2022.
“This (rise in contribution of imported inflation) will continue as global prices have started rising. Will impact core inflation” said Madan Sabnavis. chief economist at Bank of Baroda.
Global commodities that drive domestic prices or the items that drive imported inflation include petroleum products; coal; electronic goods; gold; silver; chemical products; metal products; textiles; cereals; milk products, and vegetables oils – “these together have a weight of 36.4 per cent in the CPI basket” the Reserve Bank said in its latest monetary policy report.
” Imported inflation is rising from a very low base, and reflects some customs duty normalisation, especially for gold (lower) and crude palm oil (higher)” said Rahul Bajoria, Head of India and ASEAN Economic Research at Bank of America. “We do not see any material risk from imported inflation in the near term, and the rupee remains steady against most currency pairs.”
Imported inflation tends to have an upward impact on the overall CPI inflation when the domestic currency tends to weaken against the US dollar. Keeping this in mind, the Reserve Bank will likely be more cautious in influencing the level at the rupee and ensure that it does not adversely hurt the import prices in local currency. ” The Reserve Bank will be alert on currency as imports will increase. But FPI should steady rupee” Sabnavis said.
The rupee is overvalued by 4.7 percent relative to its intrinsic worth as of end September in terms of real effective exchange rate, the latest RBI data shows. The 40 currency trade weighted real effective exchange rate (REER) index is at 104.7 as of September 27 down from 107.45 in July, RBI data showed.
Forex inflows have surged since the inclusion of Indian government bonds into the JP Morgan Index adding to the central bank’s challenge in reserves management and maintaining a fair value of the rupee against the dollar. India’s fprex reserves touched a new high to cross the $700 billion mark as of 27, September 2024 with a record weekly pile up $12.6 billion during the week
“RBI intervention has focused on limiting two way volatility in USD/INR . We expect limited depreciation pressures on INR with balance of payments surplus expected to improve in H2FY’25. Capital inflows are expected to rise as Fed rate cut cycle progresses” said Gaura Sengupta, chief economist at IDFC Bank. ” India inclusion into the JP Morgan EM bond index has supported FPI inflows into debt. FX reserves are adequate with import cover of 11.7 months (spot reserves plus forward book). We expect USDINR to rise to 84.50 by June 2025.”
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