Amid the rupee logging its sixth weekly loss today, rating agency Crisil said the sharp decline would impact inflation and force RBI to delay rate cuts.
"A weak rupee will impact the imported component of inflation, of which crude oil is a major component. With the RBI intending to sustain headline inflation to 5 per cent by end of this fiscal, the rupee slide may make the RBI pause further repo cuts," Crisil said in a statement here.
The RBI will release the next mid-quarter review of monetary policy on June 17 (Monday).
"As the rupee weakens, the imported cost of manufacturing will go up. With margins shrinking, companies will need to pass on some of the burden to consumers, if demand begins to recover. If the rupee continues to remain at current levels, we expect core inflation to breach 4.5 per cent from current estimate of around 4 per cent."
Continuing its fall for the sixth consecutive week, during which it hit a life-time low of 58.98 last Tuesday, the Indian unit closed at 57.51 to the dollar today. With this the domestic currency has lost over 5.5 per cent since May.
"We believe the current slide is temporary and the rupee will strengthen from current lows. However, it will be interesting to see how inflation will behave if the rupee ends at 57 to the dollar this fiscal against our current expectations of 54.
"In this scenario WPI inflation could move up close to 6 per cent from our forecast of 5.3 per cent," Crisil added.
The rating outfit expects crude oil prices to average around USD 103 a barrel this fiscal, down from last year's average of USD 108 per barrel.
"The rupee depreciation, however, would wipe away the gains emerging from lower crude oil prices. Sustained rupee depreciation will also increase under-recoveries on administrative fuels such as diesel, kerosene and LPG."
The agency said the weaker currency could lead to a rise in fuel prices. "The rupee depreciation will put further pressure on hiking fuel prices (especially of diesel) to contain subsidies within budgeted estimates. If the rupee continues to stay at current lows, fuel inflation, rather than falling, will edge up closer to 9 per cent."