Is the Indian central bank falling behind the curve?
It seems that growth concern has over-ridden inflationary concern. Unlike the US which does not have any inflationary concern at this point in time, for India inflation is a big issue and that should have been kept in mind. It seems that the RBI is now too much dependent on good monsoon (and subsequent arrival of bumper crops) which, it hopes, will keep the inflation down. Clearly they are mistaken.
As I have mentioned in my recent article (published by the Financial Times), non-core inflation is unlikely to create as much problem as core inflation and there is now every indication that core inflation will go up.
By keeping interest rate low (read high negative real rate), RBI continues to encourage excessively leveraged consumer demand. Given that everybody knows that interest rates are going to go up further, lower rates lead to generation of excessive demand, which is essentially a preponement of future demand. Subsequently, I believe that RBI would need to move too fast at a later stage and then this can back-fire.
Ideally, proper expectation setting through higher rate increase should have taken place. Fact is, given the supply constraints that the Indian economy faces, an average 7.5 to 8% growth is a much more desirable option. Any effort to jack up the rate by following too much accommodative policy would lead to high inflation and asset bubbles that can temporarily derail the growth process. In fact, the post policy announcement reaction of the realty stocks, confirm my feeling. Off late, real estate prices have started moving up way too fast. While the basic problems of the sector are yet to be tackled, low interest rate was interpreted as positive for the sector as more demand is expected to be generated because of accommodative policies, which again can lead to bubbles.
While short term picture looks hunky dory, the big picture is concerning. I would prefer to advise investors to be cautious and not go for momentum buying, expecting prices to rise continually.
Comments
It is our agrarian economics which still dictate our financial policies, is it any wonder then that the RBI depends on a good monsoonto keep the inflation down.
Posted by: Imtiaz Hami SEO | May 2, 2010 1:19 PM