Tags:
Journalism of Courage
Dip in inflation numbers could pave the way for a rate cut. But the rupee will need to be watched
Inflation based on the wholesale price index declined to 4.9 per cent,below the 5 per cent mark. This good news came soon after the numbers for consumer price inflation had declined to 9.4 per cent last week,clearly below the 10 per cent mark. These inflation numbers pave the way for an easing of monetary policy. The RBI may still be cautious,and wait and see if the inflation numbers continue to dip,but the probability of a rate cut is higher when inflation is lower.
At present,the rupee is being held up by foreign investor sentiment about India. Both FDI and FII have continued to be strong. Even while difficulties with investment had led us to become despondent,for foreigners,India has remained a strong investment destination. This is both due to a long-term view of India and the hope that the country will come back on track to a high growth path,and because India looks better than many other countries today. Even at a sluggish 4.5 per cent GDP growth,it is better than countries that have dipped even more. If,due to unforeseen developments global events,domestic political turmoil or a credit ratings downgrade there is a change in the sentiment about India,there is a risk that foreign capital will not come in. This would mean that the rupee could depreciate,pushing up prices of tradables. Though in the long run,it may be argued that a depreciation may be useful for exports and correcting the current account deficit,in the short run,it may be disruptive for a path of easing monetary policy.
