India: Inflation Lower, Rupee Higher

Econintersect:  The wholesale price index for India rose 7.47% year-over-year in December, but this was down sharply from the November number (9.11%) and down from 10% six months ago.  This combines with rapidly falling food inflation (GEI News) to quicken hopes that the burden of inflation much above that considered healthy may be lifting.  Just days ago Sunil Chandra detailed in an Op Ed (GEI Opinion) why he felt inflation was about to come down significantly in his country.  However, others are cautioning that it is still too early to declare the inflation problems of the past 18+ months are over.

Here are some summary bullets from Global Finance:

• December inflation eases to 7.47% on year from 9.11% in November; lowest rate in two years

• Lower food prices help, but high prices of manufactured products still a concern

• Headline inflation to ease to 6%-7% by end of March, says Finance Minister

• India central bank to consider high manufacturing inflation before deciding on rate cut, says top adviser

The comfort level for the Indian government is around 6.5% according to Rupa Rege Nitsure, economist for the Bank of Baroda, quoted by Market Watch.

The following graph shows how persistent the inflation problem has been for India since the spring of 2010.  It is also evident how significant the latest drop in the Wholesale Price Index is.

The improvement in the inflation picture has been helping the rupee.  Over the past month the rupee has been rebounding vs. the U.S. dollar, rising 5.8%.  However it still has a long way to rally to get back to the strength it last had near the end of July.  From July to the middle of December the rupee crashed, losing 22% against the dollar.  As of January 17, 2012 it still remains 15%below the value just six months ago.

Sources:  Global Finance, MarketWatch, Bloomberg, ForexPros.com, GEI News and GEI Opinion Several articles on these topics are available on Econintersect Asia newspaper page.

Hat tip to Sunil Chandra.