Even as several analysts are banking on a rate cut in February policy along with easing retail inflation, the specter of imported inflation through the falling rupee is a challenge before the Reserve Bank of India's Monetary Policy Committee.
The rupee fell to a record low of 86.59 against the US dollar earlier this week and is expected to breach the 87 level by the middle of this year, if not earlier. Officials in New Delhi are worried about the impact of rupee depreciation on crude oil imports, as well as on a large number of imports, including food items such as grains and edible oils.
“Rupee depreciation will be positive for exports but imports will be more expensive,” an official source pointed out.
Analysts also point out that core inflation could theoretically rise due to the depreciation of the rupee and the recent rise in global crude oil prices. According to Nomura's estimates, every 5% depreciation adds 0.26 percentage points to headline inflation and about 0.1 percent to core inflation.
Retail inflation eased to a four-month low of 5.22% in December, while food prices saw a marginal cooling. The MPC, headed by new RBI governor Sanjay Malhotra, is scheduled to meet between February 5 and 7 and analysts expect a 25 basis point cut in the repo rate due to easing retail inflation and slowing growth to an estimated 6.4% this fiscal. .
“Currency weakness has worsened policy exchanges. We expect the RBI to adopt a more orthodox flexible inflation-targeted monetary policy framework. If inflation is close to target despite currency weakness and growth is below trend, we expect the MPC to support growth. Hence our request for a repo rate cut of 25 basis points in February,” Nomura said in a recent note, expecting 100 basis points of cumulative rate cuts in 2025.
However, in a note earlier this month, Standard Chartered said it had pushed back its request for a 50 basis point repo rate cut from February-April to April-June. It also revised its 2025 USD-INR forecast, citing increased external sector volatility, the Reserve Bank of India's (RBI) higher tolerance for a stronger USD and tighter banking system liquidity. “We revise our USD-INR forecasts to 86.25 (84.50) by March 2025, 86.75 (85.0) by June (85.0), 87.25 (85.25) by September and 87.75 (85.50) by the end of 2025,” it said. .