The rupee continues to fall. On Monday, it crossed the 86 mark against the dollar. The greenback continues to strengthen.
Jan 14, 2025 07:12 IST First published on: Jan 14, 2025 at 07:12 IST
After breaching the upper threshold of the RBI’s inflation targeting framework in October, inflation has trended lower in subsequent months. From 6.21 per cent in October, retail inflation fell to 5.48 per cent in November and, as per latest data from the National Statistics Office, has fallen further to 5.22 per cent in December. The decline has, in part, been driven by a moderation in food prices. The consumer food price index fell to 8.39 per cent in December, down from 9.04 per cent in November. Vegetable inflation continued to ease, falling to 26.6 per cent in December. The sharp sequential fall in vegetable prices in January, as some analysts have pointed out, is likely to bring down headline inflation further. Core inflation remains subdued. Considering that inflation is trending lower, in line with expectations — this is the last inflation data before the February meeting of the monetary policy committee — it could open up space for the central bank to ease policy rates. However, there are other considerations as well.
The rupee continues to fall. On Monday, it crossed the 86 mark against the dollar. The greenback continues to strengthen. The dollar index, which measures its value relative to a basket of major currencies, is hovering around 110. Recent data points to the strength of the US labour market — non-farm payrolls rose by 2,56,000 in December, significantly exceeding expectations. This may mean that the US Federal Reserve will opt for even fewer rate cuts this year. The prospect of monetary policy remaining tight has led to the 10-year US bond yield rising further to 4.78 per cent. The pressure on the currency is likely to continue. Over the past few months, India’s foreign exchange reserves have fallen sharply — from $701 billion on October 4, 2024 to $634 billion as on January 3, 2025. While part of the decline could perhaps be due to revaluation losses, this fall provides some indication of the central bank’s intervention in the currency market to stem the rupee’s fall. Stock markets continue to correct. On Monday, the BSE Sensex fell by 1.36 per cent. Foreign investors continue to be sellers. Net investments by foreign portfolio investors are at -$2.7 billion up to January 13. On Monday, Brent crude oil was up 1.7 per cent, touching $81 per barrel, amid fresh US sanctions on Russian oil producers. This could have implications for inflation.
Alongside, concerns over growth are mounting. After the second quarter slump — GDP growth had slowed down to 5.4 per cent — the RBI lowered its estimate for the full year to 6.6 per cent. But the first advance estimates released by the NSO have pegged growth even lower at 6.4 per cent. Nominal GDP is expected to be below 10 per cent for the second straight year. Clarity on US tariffs and the stance of the Fed will emerge after Donald Trump’s swearing-in on January 20, and the Fed meeting later in the month. Thereafter, the Union budget will provide details on the Centre’s fiscal position. In an increasingly uncertain environment, the choices before the central bank are narrowing.
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