New Delhi: Government is preparing to fight rising inflation from all fronts. While it has taken a number of fiscal measures to improve supplies of essential commodities, particularly food products, the Reserve Bank of India (RBI) will also take measures to help control the price rise.
To start with, a senior banker said, RBI will allow rupee to appreciate. The central has reduced its market intervention since last one week to buy dollar, when the inflation suddenly spurted. For the week ending March 8, the inflation had crossed 5.5% mark. It further rose to 6.68% for the week ending March 15.
As inflation had come down to around 4%, the central bank used to buy dollars, to allow rupee to depreciate from a high of Rs 39.50 in February to Rs 40.77 a dollar by March 17. But as soon as the inflation figure was out, RBI reduced market intervention.
As RBI reduced purchase of dollar, the US currency started depreciating against rupee. On Monday, as per RBI reference rate, rupee appreciated to 39.97 per dollar. On Tuesday, however, it closed around Rs 40 a dollar.
The appreciation of rupee will help containing inflation as it will bring down price of imported commodities. At present, India wants to buy almost all food articles from the international market to remove supply shortage at home. The government has reduced the import duty on edible oil, pulses and rice to zero. But food prices in the international market are much higher than that in the domestic market.
So, a section of government wants to import commodities at subsidized rates to contain price rise. Rupee appreciation will make it possible as landed price of imported items will come down automatically. This will boost supply at lower price, without forcing government to give a direct subsidy.
RBI’s decision of not buying dollars will reduce liquidity, put upward pressure on interest rates, which in turn will reduce demand. When RBI intervenes in forex market to buy dollar, it infuses rupee. This increases the liquidity, which puts downward pressure on the interest rate. If interest rate falls, it will push inflation, as demand will rise.
But, appreciation of rupee will affect exports. IT companies will be badly hit. But, it seems, they will have to live with it as government and RBI have given price checking the top priority.
However, RBI will not allow rupee to appreciate beyond a point. Lehman Brothers in a report said rupee appreciation will be used to an extent only to reduce the imported content of inflation, as sharp appreciation will affect exporters.