Euro crisis may soften rupee, increase inflation

A weaker euro could result in a lower value for the Indian currency.

Consequently, inflation, which is expected to come off to 7.5% for December, and drift lower towards the 7% mark by March 2012, mainly on the back of a high base effect and a moderation in food prices, may remain at slightly higher levels than anticipated. Even without that though, the Reserve Bank of India (RBI) is unlikely to be convinced that inflation risks are low enough for it to be able to act in terms of trimming policy rates when it meets on January 24 to review monetary policy. For one, the rise in prices of non-food manufactured products, was nudging 8% for November.

Moreover, key drivers of inflation including higher incomes, wages, the minimum support prices for agricultural products, the weaker rupee and the deteriorating fiscal situation remain;the chances of a further depreciation in the currency in the wake of prolonged financial crisis in the euro zone, can only make the central bank more cautious about loosening monetary policy.

Headline inflation has stayed above 9%for 22 months now with the central bank asserting in mid-December that both inflation and inflation expectations remained above its comfort levels. The RBI

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