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Making things more difficult

As the rupee plumbs new depths, it's the currency's falling value that is giving economists a new headache. A free-falling rupee, higher service taxes, rising borrowing costs, rentals and utility bills have collectively pushed up prices.

india Updated: Jun 11, 2013 23:03 IST

Time was when price rise was about food staples like onions. This time, the causes of the tears lie elsewhere. As the rupee plumbs new depths, it's the currency's falling value that is giving economists a new headache. A free-falling rupee, higher service taxes, rising borrowing costs, rentals and utility bills have collectively pushed up prices.

All these mirror the constraints of an economy caught in a peculiar flux. Economists caution that inflation is perhaps far deeply embedded in the economy than what the wholesale or consumer price indices reveal amid an ongoing debate about the efficacy of India's inflation control measures.

Inflation expectations - or the view among consumers and businesses of where prices are heading-are above 10%, which implies that households expect the cost of living to remain high partly because of costlier services. Surging food and services costs have shrunk disposable household incomes, as consumers have to pay more for the same goods.

Such high inflation has meant average middle-income Indians are making expenditure adjustments to keep afloat. In the last three years, EMIs for home loans have only gone up. Since these EMIs cannot be compromised, the budget, therefore, is squeezed by cutting down on usual monthly expenses and even on items such as clothing and consumer durables.

In an increasingly integrated world, where goods travel across borders seamlessly, the volume and direction of commodity shipments can prove to be a useful guide to gauge the health of economies.

For a net importing nation such as India, the sharp slide in the rupee in the last few weeks, at the very least, will add another round of problems to an economy battered by soaring prices and low growth for most part of the last one year. Costlier crude oil, gold and other commodities has knocked up prices of most goods. It has also widened the current account deficit (CAD) or the gap between what dollar inflows and outflows, to record levels, a worry for an economy that is slowing down.

With summer rains well ahead of the average trend lines, there were hopes that a potentially bountiful summer harvest would push down the price curve even lower as the new crop enters the market in a month's time. The rupee's free-fall, if not arrested quickly, can turn out to be party spoiler by only helping in fanning inflation.

The government's macroeconomic managers, therefore, have lost no time in pointing out that the panic surrounding the rupee's slide is unwarranted. A weaker rupee will knock up commodity prices, widen the CAD making the job that much tougher for the Reserve Bank of India to pare interest rates in its upcoming review next week.