June headline inflation seen higher, driven by a weaker rupee

Last Updated: Thu, Jul 11, 2013 12:18 hrs

India's headline inflation probably picked up again in June as a weaker rupee pushed up manufacturing and fuel costs but it was still within the Reserve Bank of India's comfort level, according to a Reuters poll.

Wholesale prices, India's key inflation measure, rose an annual 4.90 percent last month, the poll of 25 economists showed.

The index was up slightly from May's 4.7 percent reading, which was the lowest in over three years, and just below the 5 percent mark the central bank is perceived to be comfortable with.

The RBI is expected to stand pat at its meeting on July 30 despite sluggish economic growth as a falling rupee threatens to further widen the current account deficit which stood at a record high of 4.8 percent of GDP in the fiscal year that ended in March.

"This time incrementally inflation is expected to be higher across the three segments, food, fuel and manufacturing," said Anjali Verma, economist at Phillip Capital.

"For food, largely the reason is (costlier) fruits and vegetables and for the other two segments its largely the currency weakness."

The rupee has lost 8 percent this year, making it emerging Asia's worst performing currency, as investors dumped assets to repatriate U.S. dollars after the Federal Reserve signalled plans to roll back its stimulus programme.

The Indian currency hit a record low of 61.21 to the U.S. dollar on Monday but recouped some of its losses after the RBI banned banks from speculative trading in the currency.

The RBI has cut the key lending rate three times this year, but refrained last month, warning that food prices and the falling currency pose inflationary risks.

India is one of the largest importers of crude oil and a weaker currency has made it more expensive to fuel the country's growth. Oil marketing companies have in turn passed the burden to consumers leading to a spike in prices. "Although inflation in the coming months is expected to be within the comfort zone, the recent rupee weakness and rise in Brent crude (prices) might build up the inflationary pressure in the near-mid term," said Shakti Satapathy at A. K. Capital.

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