Gaining rupee to check inflation

Inflation for the week ended May 9 inched up to 0.61% on back of costlier food items, textiles, metals and chemical products, data released by the commerce and industry ministry showed. But the appreciating rupee is expected to help in taming inflation and allow the new government to go ahead with steps to stimulate growth.

"The broad thump rule is that for every percentage point appreciation of rupee against dollar whole sale price inflation will come down by 10 basis point, that is, after factoring in the direct and indirect impact," said Abheek Barua, chief economist at HDFC bank. After falling below Rs 52 per dollar in the month of March rupee has appreciated close to 10% and is trading around Rs 47. Rupee is expected to continue the gaining streak.

With the strengthening of rupee continuing increase in prices of manufactured items including metals on account of revival in demand is expected to soften. "Domestic metal demand growth is expected to improve due to improvement of capital markets and political stability, which would spur capex and infrastructure spend...but if rupee continues the appreciating trend domestic metal prices would soften," said brokerage house Motilal Oswal in a research note.

Inflation for food items remains a sticky issue even at this time when annual inflation as measured by whole sale price index is holding close to 33 year low. Cereals and fruits became costlier over the week.

"Few cereals, fruits and other food articles have turned costlier driven by a fall in imports and an anticipated shortage with farmers planning to shift acreage to more remunerative crops such as soybean and cotton," said Somen Dash, Chief Economist at credit ratings agency CARE. With the new government expected to increase the rural and social sector spending the prices of food articles is expected to remain strong.