Inflation has stayed within the Reserve Bank of India's (RBI's) comfort zone of 5 per cent for three months now. And weak demand continues to keep core inflation benign. But this reprieve will be short-lived if the rupee continues to be weak through the year. Weak rupee is offsetting the gains from low global commodity and crude prices. While the current dollar price of crude oil (Indian basket) is almost 20 per cent below its peak of 2009, its rupee value is osculating around 2009 peak levels, thanks to the sharp slide in the rupee against the dollar.
Non-food manufacturing inflation slipped to a 42 month low of 2.0 per cent, while CCII (CRISIL Core Inflation Indicator) was at a 45 month low in June. Demand pressures will remain weak, but we could see some lift in core inflation. With a weak currency, imported costs of production go up and eventually businesses might have to pass them on to the consumers. These developments seriously challenge the RBI's aggressive year-end target of 5 per cent WPI inflation. If the rupee averages Rs 58 per USD in 2013-14, WPI inflation could rise to 6.0 per cent, as compared to our baseline call of 5.3 per cent. No action from the RBI may be the best action in this situation. Expect no rate cut on 30th July.
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