Rupee appreciation to keep inflation in check: Goldman Sachs

Rupee appreciation to keep inflation in check: Goldman Sachs

New Delhi:The appreciation in rupee will continue to put a downward pressure on inflation, which is forecast to stay around 4.4% in the new year, global financial services major Goldman Sachs said on 20 December.

“Our base case forecast for Wholesale Price Index (WPI) based inflation for 2008 is 4.4%, allowing the RBI to ease monetary policy in FY09," the Goldman Sachs report said.

The upward pressures on inflation are manageable, as long as aggregate demand continues to slow down, the rupee appreciates as per forecasts and authorities continue to resist a full pass-through of international oil prices.

“We believe loose liquidity will increasingly feed into higher inflation from current levels. However, we expect a falling output gap, the primary determinant of inflation and currency appreciation will keep inflation within the RBI’s target range of below 5%," Goldman Sachs analyst Tushar Poddar said in the report.

The growth in the broad money, which consists of the currency, savings and small time deposits, has been growing at a multi year high due to copious inflows, elevated oil prices and spending pressures on the fiscal and there is a risk that inflation may accelerate in 2008, the report said.

However, Goldman Sachs believes a falling output gap and further currency appreciation would cap inflation and allow the central bank to start lowering rates in FY09.

“We assume the 12% appreciation in the rupee this year will impact inflation next year," Poddar said.

According to Goldman Sachs analysis, inflation would go from the current level of 3.75% and an estimated 4.5% in FY08 to 4.4% in fiscal 2009, as loose liquidity passes though into inflation.