New Delhi [India], February 16 : A key downside risk to overall inflation in the country could stem from depreciating rupee, impacting the prices of imported goods, financial services firm Centrum Broking said in a report.
Rupee is trading at or around its all-time low. A depreciating rupee typically makes imported goods relatively costlier.
With steady progression in Rabi sowing and softening food prices, the food basket is projected to be a major factor contributing to lower inflation in fourth quarter of 2024-25.
India's retail inflation was at 4.3 per cent in January, hitting a five-month low and continuing to comfortably remain between RBI's 2-6 per cent target range.
This was mainly on account the drop in food prices; the fresh produce helped moderate inflationary pressures.
"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 Centrum report said.
The country was facing high food inflation over the past few months, mainly due to an increase in the inflation of vegetables, fruits, oils and fats. It now seems to have abated. High food prices were a pain point for the policymakers in India, who wished to bring retail inflation to 4 per cent on a sustainable basis.
The RBI had kept the repo rate elevated at 6.5 per cent for nearly five years to keep inflation contained. The repo rate is the rate of interest at which the RBI lends to other banks. The RBI has recently reduced the repo rate by 25 basis points to put a thrust on growth and consumption in the economy.
"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," Centrum added.
"We expect inflation to average 4.8 per cent in 2024-25. This sharp slowdown in inflation will provide RBI enough room for another 25 basis points rate cut, however, depreciating rupee needs to be closely watched as it could have spill over impact on domestic inflation," the report added.
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