The report states that Indian rupee depreciation is unlikely to have a significant bearing on the consumer price index (CPI) inflation
Highlighting that since India has a low dependence on imports for food products, a report has stated that the impact of Indian rupee depreciation on domestic inflation is likely to be muted. The major impact will be felt on the miscellaneous category, which includes gold, which is largely imported.
Bank of Baroda, in its report, highlighted that Indian rupee depreciation is unlikely to have a significant bearing on the consumer price index (CPI) inflation and will not change the overall outlook. However, the report noted that a 5 per cent depreciation in the currency is likely to push up inflation by around 15 to 25 basis points (bps) on an annualised basis, with gold, edible oils and pulses likely to see the major impact.
The CPI basket in India is heavily skewed in favour of food products, which account for around 46 per cent of the index. Due to India’s advantage as a major producer of agricultural products with near 100 per cent self-sufficiency in several crops, import dependency in the case of food products is very low.
More specifically, within the food category, India is majorly importing some pulses and edible oils. The combined weight of these products in the CPI basket is around 6 per cent, which is where the impact of the currency depreciation is likely to be felt, the report added.
However, within these categories as well, there are only specific products which are imported. Within edible oils, India majorly imports palm oil and sunflower oil, which have a weight of only 1.3 per cent in the CPI basket. At the aggregate level, about 60 per cent of the total edible oil requirement is imported.
For pulses as well, tur, urad, masur and yellow peas are majorly imported. These account for around 1.4 per cent of the CPI basket, within which only about 30 per cent is imported. Taking this into account and assuming a one-to-one pass through, the impact of a 5 per cent decline in the Indian rupee on inflation in this category would be less 5 to 10 bps,” the report pointed out.
The report added that gold, with a weight of around 1.1 per cent in CPI is likely to see a complete pass through to retail prices. BoB stated that inflation in this category is expected to increase by around 10 to 15 bps if the currency depreciates by 5 per cent.
