Not in anyone’s interest
Rohini Malkani: Apr 28 2008, 19:59 IST
The backdrop of the monetary policy due on April 29 is a marked deterioration in the domestic macro environment as compared to what it was a few months ago. Given the rise in commodity prices across all classes, as seen in most economies worldwide, inflation in India is rising while growth is cooling off. The slowdown in growth which was earlier visible on the consumption side of the economy has now spread to the investment side as well. On the external front, the slowdown in the global economy, coupled with the continued uptrend in oil prices, will result in a widening of the current account deficit, while capital flows are likely to be lower due to the rise in risk aversion and implementation of tighter norms for external commercial borrowings (ECBs).
However, headline inflation is well above RBI’s comfort zone of 5%, and assuming prices are not rolled back, inflation is likely to remain in the 6-8% range in the coming months. Thus, in addition to the recent CRR hike, with 2008 being a pre-election year and the obvious need to dampen inflationary expectations, one can expect additional measures both on the monetary and fiscal fronts.
The key question is: what’s next? On the fiscal front, besides the continuation of duty cuts/export bans, possible measures include price controls on manufactured products as well as bans on trading in sensitive agricultural commodities. On the monetary front, although the timing is tricky, further CRR hikes to drain out excess liquidity are likely.
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