Mumbai: Sustained depreciation of the rupee will fuel inflation and have fiscal implications due to spike in the subsidy bill, economists have said.
"Depreciation of the rupee, if sustained, will be inflationary. It will also have fiscal implications as the government expenditure will be more on the subsidy bill side," Crisil chief economist D K Joshi said Thursday.
He also said that servicing of corporate debt, raised through the external commercial borrowings (ECB) route, will become expensive due to the fall of rupee, which has lost over 6 percent since the beginning of last month.
Pain of the rupee slide increased after FIIs pulled out around USD 3.7 billion from the debt market due to apprehension of tapering of US stimulus.
The local unit closed at 57.98 to the US dollar today, down 19 paise despite the pep-talk by the Finance Minister, improvement in the sovereign outlook to 'stable' by Fitch Ratings and the RBI intervention yesterday.
On the monetary policy response to the depreciation, Joshi said the central bank may hold rate in the next policy review scheduled for June 17.
Earlier, brokerage firm Nomura said in a research report that given a large share of global commodities in the WPI basket (around 35 percent), a depreciating currency will add to imported inflation pressures. As per the research firm's estimates, every 10 percent depreciation in rupee leads to 60-80 basis points rise in WPI inflation.
"Any sustained fall in the rupee will add to inflation, especially WPI, as the weight of imports is higher in WPI. This will also complicate the job of RBI towards further monetary easing," StanChart India senior economist Anubhuti Sahay said.
She also said there is no one-to-one correlation between the falling rupee and rise in exports as this would depend on the external demand.
Meanwhile, Finance Minister P Chidambaram said this morning that there is no need of panic over rupee depreciation against the dollar and assured investors that policymakers will take steps to curb volatility in the forex market.
"I don't think we need to panic about what is happening in rupee. Yes, it does put pressure on inflation, it puts pressure on subsidy bill, specially on imported commodities. But I think rupee will find its level. And I think authorities will take measures to ensure there is no volatility," he told reporters in New Delhi.