Diving Re adds to RBI’s inflation,rate worries

Many traders now expect the rupee to fall to 54.50 in coming sessions and some even believe the currency could weaken to 55 to the dollar within days — good for exporters but bad news for importers,especially oil companies.

According to Robert Prior-Wandesforde,economist,Credit Suisse,it’s tempting to suggest that the fall in the currency will have disastrous effects for wholesale price inflation,which has been running at around 10 per cent for more than eighteen months now. “Our estimates suggest that the weaker rupee can be expected to add more than two percentage points to inflation,assuming everything else is unchanged,” he said.

“Cyclical pressures from high interest rates and inflation remain and have kept both consumption and investment muted so far. While inflation could moderate going ahead making its way to a level of 7.0-7.5 per cent by March 2012 it is unlikely to be enough to turn the situation around,” said Abheek Barua,chief economist,HDFC Bank. The weakening of the rupee will put severe pressure on inflation at a time when the RBI is trying hard to bring it under control. The RBI is not in a position to bring down policy rates without first controlling inflation.

The forex market turned nervous after government data showed India’s industrial production fell a steeper-than-expected 5.1 per cent in October. “The RBI is unlikely to intervene in the forex market in a big way. If the RBI takes some steps like a cut in the cash reserve ratio,the rupee might bounce back,” said a banker. Investors also remained worried about India’s growth story. Economic slowdown,rising fiscal deficit and widening current account deficit (CAD) have dented investor confidence.

While the rupee has softened sharply,so have most international commodity prices. “Indeed,our measure of rupee-denominated commodity price inflation has already halved from 40 per cent to 20 per cent and will drop close to zero by fiscal year-end if the level of this series now flattens out. This reflects the impact of helpful base effects (commodity prices rose very sharply between October 2010 and March 2011),” Prior-Wandesforde said.

Sensex up 132 points on value buying

The BSE Sensex on Tuesday regained the 16,000 mark,moving up 132.16 points at 16,002.51 on fag-end value buying. The NSE Nifty rose 36 points or 0.76 per cent to 4,800.60,after reaching the day’s low of 4,728.50.

PTI