RBI warns of falling rupee stoking inflation

The Reserve Bank said the falling rupee will likely offset the positive impact of above-average monsoons on inflation. The rupee so far has lost over 20 % since the beginning of this fiscal, and closed down with a loss of 44 paise at 64.55 to the dollar.

As of August 13, the monsoon was 10 % above normal with 85 % of the Met divisions recording more than normal to average rainfall, helping improve the Kharif sowing by 11 %, the RBI said in its annual report over the previous year.

In the July monetary policy review, RBI has pegged annual inflation at 5 %, which though is not an official price index target.

"Although headline inflation had moderated in Q1 to an average of 4.7 %, risks on the inflation front are still significant. "First, this is evident in a rebound in inflation to 5.8 % in July. Creeping inflation pressures are visible arising from rising food and fuel prices, the latter in large part due to the exchange rate depreciation, which was evident in food inflation resurfacing since May," the RBI said.

The report further warned that while moderate MSP increases and the good monsoons give hope that inflation will be contained, if high food inflation persists into H2, the risks of generalised inflation could become large.

It also warned that due to the good rainfall, the demand-supply balance may be disturbed due to more demand from the hinterlands. "Demand deceleration continues, but rural demand may stay robust in the wake of a likely good crop on the back of normal monsoon.