A sliding rupee is the last thing Indian policy makers would ask for as they struggle to contain inflation that ran up to a 13-month high for August defying an 18-month long monetary tightening.

A sharp depreciation in the rupee is seen fuelling price of imported commodities, particularly oil. India meets 80% of its oil requirements through import. Benchmark brent crude oil prices hit a six-week low near $103 a barrel on Friday on concerns about the outlook for the economy and oil demand. However, a depreciating rupee could nullify the advantage.

The Indian currency on Friday fell to a 28-month low of 49.90 against the US dollar. A flight of capital flows to perceived safe havens has been weakening the Indian unit for the past three straight weeks, with the week to September 23 turning out to be the worst in more than 15 years.

It has shed nearly 13% since its highest level of 43.855 to the dollar, reached on July 27 this year.

Mounting fears that Europe?s persistent debt woes will trigger a broader financial crisis has roiled markets. And with policymakers last week failing to convince markets they can prevent the world from relapsing into a recession, analysts see further capital outflows from emerging markets toward US treasury that will put downside pressure on the Indian rupee.

?If the markets remain jittery and no consensus is reached on the euro debt crisis, I see further weakening of the rupee,? said Abheek Barua, chief economist at HDFC Bank. ?It may cross 51-52 in the next few days. Also with the RBI showing no signs of significant intervention, the fall in rupee will be prolonged.?

The RBI?s intervention in the forex market to arrest the rupee?s slide has been marginal so far. Last week, deputy governor Subir Gokarn said the RBI would intervene only to smoothen volatility. However, in its latest policy, the central bank said a falling rupee could have adverse effects on inflation.

Using foreign exchange rate to fight inflation is not part of the RBI stated policy, but a strong domestic currency does help against imported inflation.

Early this month, State-run oil firms raised petrol prices by nearly 5%, which is expected to have a direct impact of seven basis points to WPI inflation, according to the RBI.

A weak rupee also threatens to push up India Inc?s input cost as Indian firms import bulk of their capital goods. Non-oil import bill, bulk of which comprises capital goods, was $28 billion in July.

?In a near term, some impact will definitely, be on inflation, some 30-40 basis points,? Barua said.

Inflation has stayed over 9% for the last four months and persistently above the central bank?s comfort zone of 4.0-4.5% despite 12 rate hikes. The RBI has hinted at persisting with monetary tightening in the near term, saying it would be too soon to ease back from anti-inflationary bias.

High interest rates in India should attract foreign capital, which would help the rupee to appreciate. However, a cumulative rate hike of 350 basis points since March 2010 has cooled growth more than prices. Kaushik Basu, the finance minister?s chief economic advisor, has said he has had reservations about the last rate hike.

With concerns mounting on economic growth amid an uncertain global outlook, odds remain even whether the RBI would walk the talk and raise rate again on October 25. A worsening outlook for the global economy should cool commodity prices, which should help the central bank?s inflation fight. But the possibility of another round of quantitative easing in the US could upset those calculations. ?If the US economy worsens then commodity prices will crash but if quantitative easing is announced then we are heading for another trouble,? said Indranil Pan, economist at Kotak Mahindra Bank.