Rising inflation, high deficit to keep pressure on rupee

High interest rate alone has not dented growth

On a day when the rupee tumbled to a two-and-a-half month low of 55.12 to a dollar, the Reserve Bank of India (RBI) on Wednesday renewed its concerns about high inflation, swelling fiscal and current account deficits, saying the Indian currency cannot gain in strength as long as these factors remain.

“Inflation is high, fiscal deficit is high, current deficit is high. How can you expect the rupee also to be high,” RBI Deputy Governor K C Chakrabarty said.

The rupee had last settled at 53.43 on September 13, 2012.

Market experts said a high trade deficit and crude demand soaring to $7,25,000 per day  on average is putting pressure on the rupee.

India’s trade deficit widened to a record $20.9 billion in October, a big concern, given the country is already suffering from a wide current account deficit.

Oil firms, the largest buyers of dollars in the domestic currency market, were spotted buying the greenback persistently this week, traders said.

The Deputy Governor, however, said that there could be new normal for India’s inflation going further.

“If our economy is getting integrated with the global economy, , our inflation cannot be much different from that,” Chakrabarty said.

The RBI has all along maintained a comfort zone between 5-6 per cent for inflation.

Against rising hopes, various industry players demanding  reduction of interest rate, the deputy governor said the RBI will be very cautious in reducing the interest rates, as low interest rates should not result in collapse of the financial sector.

He said core inflation must be reduced to 1 per cent, which will reduce the cost of borrowings and expand the manufacturing sector.

Core inflation or inflation for manufactured products excluding food items, eased to 5.2 per cent in October from 5.6 per cent in September.

Further, dismissing the argument that high interest rates are responsible for slowdown in economic growth, he said high inflation has resulted in moderation of economic growth.

 “What we are trying to say is that the interest rate is not the only reason for the slowdown in growth. But inflation is definitely a reason for slowing down the growth,” he told reporters on the sidelines of the Assocham Banking Summit.

Chakrabarty said the economy slowing down is due to a   variety of reasons.

“Yes, to the extent monetary policy is not able to control inflation and not effective. It is responsible. We cannot say that something wrong is happening in the economy, we are not responsible. Collectively, we are all responsible,” he added.