On Wednesday,Morgan Stanley said the 0.25 per cent rate cut by the RBI is unlikely to be effective unless the retail inflation eases,coupled with an improvement in deposit growth. Standard Chartered too cut its house view on the rate cut expectations following RBIs cautious tone on its outlook in mid-quarter policy statement,wherein the central bank specifically singled out the likelihood of inflation staying range bound in the 6 per cent-plus bracket,alongside the high current account deficit,as the inhibiting factor that limits the headroom for further rate cuts.
From the RBIs perspective,its a difficult toss-up. Indias growth-inflation dynamics on either side of the 2008 global financial crisis seem to offer compelling evidence of the fact that inflation has to be controlled first,and that this will eventually help growth too. In the three year period ahead of the 2008 global financial crisis,the economy grew by 9.5 per cent on an average,spurred largely by a ramp up in fixed investment. This expanded overall production capacity to match growing demand and kept core inflation down. Post-crisis,the story changed,with investment declining to half its pre-crisis rate even as consumption demand stayed at the pre-crisis level until last year,partly due to the Centres entitlement and welfare programmes,stoking non-food manufactured inflation.
Anil is a Senior Editor based in New Delhi.
anil.s@expressindia.com
