Monetary Easing and Inflation in India
India's central bank may have the flexibility for monetary easing in future scenarios due to the dynamics between global crude oil prices and the rupee's value against the US dollar.
Crude Oil Prices vs. Rupee Value
- Decline in Global Crude Oil Prices: Brent crude oil prices have fallen by 7% since January.
- Rupee's Depreciation: The rupee has weakened by approximately 1.5% against the US dollar in the same timeframe.
- Impact on Imported Inflation: The decline in oil prices helps mitigate the inflationary impact of a weaker rupee, except for some items like airline fuel.
Impact on Consumer Price Index (CPI)
- External Influences: About 40% of the CPI basket is affected by external factors. A 1% depreciation in the exchange rate results in a 7 basis point impact over two to three months.
- Sensitivity Analysis: A 5% rupee depreciation adds 35 basis points to headline inflation. However, declining global commodity prices can offset this impact.
Retail Fuel Prices and Monetary Policy
- Stability in Fuel Prices: Despite losses on LPG, retail petrol and diesel prices are expected to remain unchanged to compensate for oil marketing companies.
- January CPI Inflation: Stood at 4.3%, contributing to a reduction of the repo rate by 25 basis points to 6.25% in February.
- Potential for Future Rate Cuts: Easing energy prices and reduced import bills can facilitate further rate reductions.
Economists express concerns about the spillover effect of a weak rupee, considering the impact on the 40% of the CPI basket influenced by external factors. However, decreasing crude prices provide relief, supporting consumer price reduction and potential monetary policy easing.
