India should push ahead with hiking prices of domestic fuels India's annual GDP growth accelerated to 9.3% in the three years to 2007-08 owing mainly to three key drivers: (1) greater impact and acknowledgement of favourable structural factors; (2) strong global cyclical growth uplift; and (3) exceptionally easy global liquidity conditions and heightened risk appetite that caused a surge in capital inflows into emerging economies, including India.
The structural factors driving India's economic rise remain well entrenched and thus safeguard the attractive medium-term outlook. However, the other two factors have reversed course, and will undoubtedly extract a price for the excesses of recent years. Growth will slow down this year and next, led by deceleration in investment spending, and some rolling over in consumption. GDP growth will moderate to a touch over 7% next year, not a bad outcome considering the global backdrop and the domestic constraints, but lower than the sustained 9% or so several businesses and investors had unrealistically assumed. The impact of the global mayhem will be transmitted via softening external demand and lower capital inflows, especially portfolio investment. The reversal in foreign capital inflows, which is already playing out, will affect local money market liquidity and the rupee. Policymakers here are well positioned to cushion the adverse impact, owing mainly to the sensible approach by the former Reserve Bank governor Y V Reddy, which also sets the stage for greater liberalisation now. The policy response in the coming months will be a reverse of what happened over the last 2-3 years when the RBI was faced with surging capital inflows, and had to hike the cash reserve ratio (CRR) and check rupee's appreciation. Now, the worsening balance of payments will adversely affect local money market liquidity, and also put pressure on the rupee to weaken. Interest rates for non-resident Indians have already been increased, and will likely to be increased further. Also, policymakers will ease the restrictions on capital inflows to ease dollar supply, though it will now be far more expensive for firms to borrow internationally. Intervention in the foreign exchange market to check rupee's weakness will tighten local liquidity, which in turn will set the stage for unwinding of securities issued under the market stabilisation scheme, and for cuts in CRR. Real interest rates are pretty high (ignore those who were screaming for rate cuts some time back but now argue that real rates are too low!) Expectations of lower inflation will also prompt significant reversal in interest rates. Given the local constraints and the global backdrop, last week's quasi and temporary cut in the statutory liquidity ratio (SLR) was perhaps the only workable option, especially since the central bank cannot cut CRR just yet. Still, it also shows the ad-hocism in policymaking due to, among other things, exceptional and adverse global factors, the need to check rupee depreciation and the fiscal bleeding that is forcing banks to lend to the state oil companies. Indian policymakers cannot control global factors, but they should push ahead with increasing local prices of some fuels, so as to check the fiscal mess. The greatest challenge for policymakers will be to deflect bad advice, and there has been plenty going around in recent years. It is ironic that those who were rooting for a free-floating rupee when it was under pressure to appreciate appear to have done a convenient about-face and are now making the case for greater intervention by the RBI to prevent rupee weakness! It is worth remembering that currency flexibility is part of the solution, not part of the problem. -- Visit site at – http://investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Forums- http://forums.investorline.co.in/ Iwebs Open Source Web Publishing Platform - http://webs.investorline.co.in/iwebs/ --~--~---------~--~----~------------~-------~--~----~ Get latest market updates & search internet right from your browser-download our toolbar here- http://investorline.ourtoolbar.com/ Visit our site at – http://investorline.co.in/ Newsroom: http://newsroom.investorline.co.in/ Learning Center- http://learning.investorline.co.in/ Mutual funds - http://mutualfunds.investorline.co.in/ Life Insurance - http://insurance.investorline.co.in/ Investor Journal - http://research.investorline.co.in/ Newscatcher- http://catcher.investorline.co.in/ Interested in Financial Planning-Let us Contact you- http://spreadsheets.google.com/viewform?key=pb_z4f1_zGMg4iBBFT3-SWQ&email=true If you like the site then promote it here- https://www.freetellafriend.com/tell/?url=http://investorline.co.in/blogs/news Create your own free blog on- http://investorline.co.in/blogger Visit this group at http://groups.google.com/group/india-investor -~----------~----~----~----~------~----~------~--~---
