As the rupee depreciated to a historic low, the fear of further spike in domestic fuel prices rose, which could, in turn, push up transportation prices and make essential commodities costlier. This will lead to inflation going up by at least one-and-a-half percentage points above the RBI target of 6%.
A Barclays report expects elevated inflation could prompt the monetary policy committee to undertake another 50 basis points hike in the repo rate in June. The brokerage sees food inflation rise to 7.8% in April, the highest print in 17 months.
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India, a net importer of crude oil may face multiple headwinds with crude rising to $111 per barrel and the rupee hitting an all-time low of 77.4 to a dollar. The immediate consequence will be more rupee outgo for the same quantity of import of petroleum products. This will make petroleum products costlier at home or in other words, raise inflation.
The retail price inflation in April is likely to surge past 7.5% on the back of higher food and fuel prices.
Besides, the rise in imports is also likely to push the current account deficit, which is by far under control. According to ICRA, the current account deficit rises by 0.4% of GDP with every $10 a barrel rise in the average price of the Indian crude basket.
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A weak rupee also raises the overseas borrowings by Indian companies, which may lead to slowing down the economic growth at a time when domestic banks are cautious about the disbursement of loans.
The falling rupee could also make education in foreign countries more expensive. Foreign holidays, which have already been impacted by the Covid pandemic, could get another blow if the downward slide of the rupee continues.