Falling rupee poses new challenge to RBI MPC

The specter of inflation being introduced by a falling rupee poses a challenge to the Reserve Bank of India’s monetary policy committee, even as several analysts are mulling a rate cut in February policy as retail inflation eases.

The rupee fell to a record low of 86.59 against the US dollar earlier this week and is expected to breach the 87 level by the middle of this year, if not earlier.New Delhi officials are understood to be concerned about depreciating crude oil imports with the impact of the rupee as well as an abundance of imported goods, including foodstuffs such as pulses and edible oils.

“The devaluation of the rupee has been positive for exports, but it will also make imports more expensive,” the official source said.

Analysts also note that core inflation could theoretically rise due to the depreciation of the rupee and the recent rise in global crude oil prices.Every 5% depreciation adds about 0.26 percentage points to headline inflation and about 0.1 percentage points, according to Nomura estimates. to core inflation.

Retail inflation eased to a four-month low of 5.22% in December and food prices saw a marginal cooling.The MPC, chaired by new RBI Governor Sanjay Malhotra, is scheduled to meet on February 5-7. period, and analysts expect a 25 basis point cut in the repo rate amid subdued retail inflation and a slowdown in growth, which accounts for approx. 6.4% at this fiscal level.

“Currency weakness has worsened policy trade-offs. We expect the RBI to follow a more conservative inflation-oriented monetary policy framework. If inflation is close to target despite currency weakness, we expect that MPC will support growth. Hence our call for a 25 basis point repo rate cut in February,” Nomura said in a recent note. in, adding that it expects 100 basis points of cumulative rate cuts in 2025.

However, in a note earlier this month, Standard Chartered said it pushed back its call for a 50 basis point cut in repo rates to April-June. It also revised its 2025 USD-INR forecast in light of the external sector rising volatility, evidence of higher Reserve Bank of India (RBI) tolerance for a stronger US dollar and tighter liquidity in the banking system revising our USD-INR forecasts to 86.25 by March 2025 (84.50), 86.75 by June (85.0), 87.25 (85.25) by September and 87.75 (85.50 ) by the end of 2025,” the statement said.