Chillin' out till it needs to be funded
While all economists worth the brand have spoken and most of Corporate India has started readying itself for a relatively harder access to money in this phase of controlling inflation, no one expects more than 25 bps for rate hikes or that something fundamentally new will be delivered for facilitating Policy transmission to pass on the benefits of rate cuts / channel gap measures to credit customers and maintaining the 75% Credit Deposit Ratio.
However, India’s growth story is intact despite the expected challenges in 2011-12 that have not materialised. Double digit inflation cannot be wished away and given India’s push and control on inflation showing in abelow 8% rate currently, we do not need to correct any liquidity imbalances in the system as most of them are related to the Oil spiral and the up t ick in commodities. Will that ever hit growth, unlikely..as India has started growing exports that are self paying and where passing higher prices will be relatively easy. Unlikely again as Consumer disposable incomes have grown 15-20% in the last 2-3 years and every year we add a million luxury customers to the economy with access to HD TV, cars, more expensive televisions and iPads. Growth has till now run ahead of inflation and thus the request for a policy rate exceeding the probable year end inflation rate may not find many takers either.
However, India’s policy makers are likely to start building up the role of the rupee given the constant appreciation over the next 5 years and start parking our forex reserves of $300 million in more Gold and even Chinese currency ( China is anyway looking at doing trade in local currency to hedge the Dollar) while waiting for the Export rebound to materially impact deficits and growth rates which have temporarily dipped in autos for example for factors beyond input costs and capacities
As far as the comparison to “staying back and doing nothing” compares to western world’s date with economic death, i believe there we are definitely a couple of decades to go towards the place where the Western system broke down. Inflation is naturally coming down and when it does go up to double digits it may not be able to threaten India’s growth commitments as long as we are able to make a revenue positive case from International trade