A report by financial services firm Centrum Broking warns that a weakening rupee poses a significant risk to India's inflation trajectory, potentially increasing the cost of imported goods amd pverall spending of Indian households.
The rupee is currently trading near its all-time low, and its depreciation could offset the recent easing of inflationary pressures, the report noted. A weaker currency typically makes imports more expensive, raising concerns about its spillover effects on domestic prices.
"January's CPI breather was primarily on account of softening food prices, i.e. vegetable prices. We expect prices to further cool from here as fresh vegetables and pulses are anticipated to hit the market," the report said.
Centrum Broking projects that inflation will average 4.8 per cent in 2024-25, with the Reserve Bank of India (RBI) having scope for another 25 basis points rate cut. However, the firm cautioned that a depreciating rupee could disrupt this trend.
India’s retail inflation stood at 4.3 per cent in January, marking a five-month low and remaining within the RBI’s target range of 2-6 per cent. This decline was largely attributed to falling food prices, as an influx of fresh produce helped alleviate inflationary pressures.
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The report highlighted that Rabi sowing has progressed steadily, which, combined with softer food prices, is expected to be a key factor in keeping inflation under control in the fourth quarter of 2024-25.
The RBI had maintained the repo rate at 6.5 per cent for nearly five years to curb inflation. Recently, it reduced the rate by 25 basis points to stimulate economic growth and consumer spending.
The repo rate is the interest rate at which the central bank lends to commercial banks.
"As the MPC has maintained its 'Neutral' stance, the future course of rate cut will be dependent on the incoming macro data. With the inflation woes taking a backseat for now, the RBI will have more room to focus on growth," the report added.
India had been grappling with elevated food inflation in recent months due to rising prices of vegetables, fruits, oils, and fats—a major concern for policymakers aiming to sustain retail inflation at 4 per cent.
With food prices easing, pressure on the central bank to maintain a restrictive monetary policy appears to be diminishing.
The report urged vigilance regarding the rupee’s depreciation, warning that it could undermine the progress made in stabilising inflation and complicate future monetary policy decisions.
Also read: India inflation to average 4.8 pc in 2025 says report
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