Sustained rupee depreciation may escalate inflation: Fitch

Global rating agency Fitch today warned that sustained depreciation of rupee will put pressure on inflation which has starting showing signs of moderation in recent weeks.

"Moreover, the Indian rupee weakened to an all-time low against the US dollar of around 52 in November 2011... This level could give a further upward kick to inflation in 2012 and complicate policy management still further," Fitch said in its special report.

Both China and India face a combination of slowing activity and stubbornly high inflation, underlining the risks that can arise from allowing inflation to rise above desired ranges, the report titled 'Resilience in Global Uncertainty, and Strengthening Emerging Asia Ratings Momentum' said.

Fitch has revised its forecast for India's growth in 2012-13 to 7.5%, from 8.2%, as inflation and monetary tightening are weighing on investment.

The Reserve Bank of India raised its key policy rate by 2.25% over 2011 to 8.5%, although this still left the rate negative in real terms against headline wholesale price inflation of 9.1% in November, it said.

India is constrained by negative real interest rates and the high public deficit and debt burden, it said.

It also noted that India and Sri Lanka are the only emerging Asian countries to run deficits on "basic balance" (the current account plus net foreign direct investment).

This structural weakness may help explain why the Indian rupee fell to a record low against the US dollar in December 2011, while Sri Lanka devalued its currency in November, it said.