www.thesuniljain.com

Piling on the straws PDF Print E-mail
Friday, 18 March 2011 00:00
AddThis Social Bookmark Button

To hike or not to hike, was ultimately not an issue for Hamlet or rather RBI, as it has gone in for the 8th round of rate hikes, which was, in fact expected by the market. This monetary policy review was not expected to go beyond interest rates; and liquidity, though tight, has been so for over 6 months, was not expected to be addressed. One can guess that RBI expects conditions to return to normalcy when we enter the new financial year and that the present high levels of borrowing from the repo window are temporary. The statement is brief and highlights that the economy is still under the threat of inflation, which will not reach the 7% mark by March-end, but be closer to 8%. Therefore, RBI has persevered with the rate hike. It has highlighted core inflation as the main concern today, which goes beyond the ordinary argument of supply bottlenecks. But the question to be asked is whether or not this core inflation is due to high demand pressures. Is the economy getting overheated? One is not sure, if one looks at the industrial activity that may have shown signs of slowing down. Also, investment is slated to be lower this year according to the CSO and the government has not been spending. Besides, GDP growth at 8.6% is not significantly higher than 8% last year to fuel these thoughts. In that case, where is the spending that has to be curbed through higher interest rates? If this was the case, the higher prices of manufactured goods could just as well be driven by high commodity prices—metals and crude oil, which are actually imported from the global space.

Food inflation is coming down and will probably continue to do so on the back of a high base year as well as rabi harvest flows. So the rate hike may have a limited impact on inflation emanating from primarily

supply impulses or rather the lack thereof. Banks have been equivocal in their response of whether they will be increasing rates—if they don’t, then the hike would not be justified and if they did, it will further affect investment decisions. Clearly, RBI’s take could leave one confused as one does not quite know what to expect in future. Will RBI continue to increase rates and, if so, do they have a target number of inflation in mind? What one can conclude is that RBI will keep looking at the inflation number before releasing its foot from the rate hike pedal and the number could be 6% to begin with. What happens to growth in this period? One cannot guess as every hike in the past has had industry saying that it has reached the limit but corporate numbers have so far not reflected the pain. While this is comforting news, we cannot stretch our luck.

 

You are here  : Home Miscellaneous Piling on the straws