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No lower EMIs? falling Rs to make imports costlier, stoke inflation

business Updated: Jun 12, 2013 02:34 IST
HT Correspondent
HT Correspondent
Hindustan Times
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The fall in the value of the rupee has weakened the chances of your home loan EMIs coming down.

How? Because Reserve Bank of India Governor D Subbarao may be unwilling to cut interest rates, as the fall in the rupee will fan inflation by knocking up prices of oil and other imported items.

This could, in turn, make many items like cars, steel, capital goods and others, more expensive.

"It (continuous fall in rupee) leaves lesser space for the Reserve Bank to cut rates," said Harihar Krishnamoorthy, head of treasury operations, FirstRand Bank. "Two weeks ago, experts were predicting a 0.25 percentage point cut in interest rates but now there is only a 50:50 chance of that happening," he said.

Rates cut hopes had risen following a decline in the wholesale price inflation to 4.89% in April, a 41-month low, and a fall in the consumer price in inflation to under 10%. The RBI has said in the past that 5% is its comfort level for inflation.

A depreciating rupee makes imports costlier and India imports much more than it exports. Total exports for April stood at $24.16 billion while imports were almost 70% higher at $41.95 billion.

A persistently falling rupee inflates India's crude import bill and may force oil companies to raise retail prices of petroleum products.

Crude oil accounts for about one-third of India’s total import bill. Costlier fuel will knock up prices of most goods and stoke inflation.

However, experts said that cutting rates on June 17 will allow the economy to recover from the slowdown.

"Keeping rates high will likely only further defer any possible recovery, deter FII equity inflows, delay re-accumulation of forex reserves and depreciate the rupee further," said Indranil Sen Gupta, India economist, DSP Merrill Lynch (India).

"Lower rates can spur hopes of recovery, attract FII equity inflows, especially given the current correction, and provide the RBI an opportunity to recoup forex reserves," he said.

So, which way will RBI lean? Will it gamble on growth? We will find out on June 17, when Subbarao will disclose his cards.