Headline inflation based on the Wholesale Price Index may have started to ease a bit, fuelling hopes that it will remain benign through 2012. But the depreciating rupee could well undo all the gains by pushing up the so-called ‘imported component’ of inflation.
Imported inflation (inflation due to an increase in the price of imports) has risen to 46% in the last six months from 35% due to the depreciating rupee.The fall of the rupee has significantly pushed up import costs in the last few months. The global crude oil price (brent), for example, at above $100 per barrel, has put on an additional Rs 1,000 per barrel in this period due to the plummeting rupee.
The seasonal impact and favourable base effect – the level of inflation in the corresponding period of the previous year — have led to softening prices.
Food inflation for the week ended December 3, declined to 4.35% against 6.6% in the previous week. Headline inflation too showed signs of easing though it remained high at 9.11%. “If inflation continues to show a declining trend, then perhaps the Reserve Bank of India will start reversing its policy,” C Rangarajan, chairman, Prime Minister’s Economic Advisory Council said on Friday. “Therefore, it is predicated only on one assumption and that is the inflation going down.
“Inflation will soften primarily due to seasonal impact and favourable base effect provided all factors remain unchanged. In case of a sudden spurt in global commodity prices, inflation could rise again,” Soumya Kanti Ghosh, director and head (economics & research) Ficci said.