How many hikes?

Last Updated: Thursday, December 15, 2011 - 17:52

Reema Sharma

The issue of deciding the priority between economic growth and price rise is getting trickier day by day. What should be RBI’s stance at this point of time? Should it focus upon combating inflation or should the spotlight be upon stimulating waning economic growth? The question is not about either –or, it’s all about what should be treated first.

Negativism has become the order of the economic scenario in the country. Stock market, value of Rupee v/s dollar, overall growth target, everything seems disturbing. On top of that, worsening global economic uncertainties and political turmoil at home pose a serious threat to the overall economy of the country.

Added to this, India’s industrial output has tumbled for the first time in more than two years. This also highlights the susceptibility of India’s economy which has set its growth target for the Financial Year 11-12 at nine percent and later slashing it down to 7.5 percent.

Independent surveys have time and again pointed out that the GDP may go down below seven percent. The issue right now is: will lower IIP strengthen the case for the RBI to ease its monetary tightening policy? The matter becomes even more pertinent when Asia’s third-largest economy is on the brink of cooling off rapidly.

In its desperate effort to clamp down on inflation, RBI has raised benchmark lending rates 13 times since March 2010. For the past 12 months, inflation on average has been hovering around double digit figures. Headline inflation for the month of November was recorded at 9.11 percent as against 9.73 percent in October. This is still above the RBI’s comfort zone of five to six percent.

This is like a double edged sword; a little deviation here and there might prove fatal. In the last review, RBI had indicated that there could be a pause in rate hikes if inflation situation improves.

However, this Thursday, government data showed that food inflation eased to 4.35 percent, its lowest level in over four years. The fall in India’s annual food inflation in late November indicated that the RBI’s interest hikes are having the desired effect, but with annual overall inflation still higher than 9 percent, it is still a matter of concern.

India has slashed its full-year growth forecast amid slowing domestic and global demands, with officials warning the government was facing a serious balance of trade problem and will have a tough time meeting its fiscal deficit target.

Rupee has fallen more than 18 percent this year against the dollar. The volatility of rupee threatens to create a negative spiral for India which imports more than three-fourth of its oil requirements. The vicious circle too appears to be endless. Continuous rupee depreciation would result in widening current account deficit and that would keep the rupee under constant pressure.

Right now focus should be laid upon halting the policy rates. A cut in the CRR which has been at constant 6 percent since May 2008 will also help in the liquidity inflow. This decision may not be the only panacea to tackle the declining economic scenario but investor’s confidence might surely return. Psychological security is all that can fill in the blanks!

First Published: Thursday, December 15, 2011 - 17:52

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