Euro crisis may soften rupee, increase inflation

“While headline inflation could still moderate to 7% by end-March 2012, thanks to continuing sharp disinflation in food prices, it is not yet clear whether inflation will remain anchored below 7% through the course of 2012,” economists at Deutsche Bank wrote in a report last week.

They added that while their base case scenario factored in an average inflation of around 6.5% for FY12-13, any supply shock, such as a poor monsoon in 2012, could pose 150-200 basis points of upside risk to inflation. “We expect the RBI to be cautious before declaring victory over inflation,” they concluded.

While the bond markets have been hoping for additional liquidity through a cut in the Cash Reserve Ratio (CRR), that’s unlikely to be forthcoming.

The central bank may prefer to dole out liquidity to those banks that want it, through bond buybacks, rather than dishing it out to the system as a whole. Moreover, those banks that are in dire need of cash do have the option of borrowing through the Liquidity adjustment Facility or the Marginal Standing Facility.

Indeed, economists point out that a cut in the CRR at this stage might be read by the markets as a sign that inflation had been tamed, something that the RBI would be wary off.

Also, loan growth has moderated to sub 16% levels whereas deposits have been growing at a fairly brisk pace. While the central

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