Declining value of the rupee may limit the scope of further rate cut by the Reserve Bank of India (RBI) despite easing of inflation in recent months, credit rating agency Fitch said today.
"The recent weakness of the exchange rate may, however, complicate policy management and limit the scope for further cuts in RBI policy rates," Fitch said in a statement.
Since January 1, the rupee value has fallen by 5.5 per cent against the US dollar and touched life-time low of 58.98 on Tuesday.
The RBI is scheduled to announce its mid-quarter monetary policy review on June 17.
Amid decline in industrial production and easing of inflation, industry has been clamouring for further cut in policy rates.
Fitch said inflation pressures have begun to show more pronounced signs of easing in response to weaker economic conditions and the tightening of monetary conditions by the RBI during the course of 2011-2012.
However, since January 2012 RBI has been reducing the key policy rates and has cut them by 1.25 per cent since then.
Falling for the third straight month, retail inflation stood at 9.31 per cent in May. It was as high as 10.39 per cent in March.
The growth in the index of industrial production (IIP), meanwhile, has slipped to 2 per cent in April from 3.4 per cent in March.
Industry has been complaining that high interest rate has adversely impacted the country's growth prospects.
Referring to Indian banking sector, Fitch said its profitability and capital position will remain under pressure as asset quality continues to gradually deteriorate.
"Nonetheless, Fitch does not view the banking sector as a material risk to macro-financial stability nor to public finances in terms of the crystallisation of large contingent liabilities," said Fitch while revising India's credit outlook to 'stable' from 'negative'.
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