The Hindu Business Line : Moody’s blues

Moody’s warns that economic factors like failure of fiscal policy to battle inflation and external shocks could work against the country and lower its international rating.

The Indo-US nuclear deal that cleft the ruling coalition and gave the UPA Government new allies in the Samajwadi party may yet have a tortured passage to fruition but its potency in shaping India’s near future is not restricted to political alignments. Now, Moody’s, the international rating agency, informs us that the deal’s passage could lend support to India’s international rating. It is not exactly clear what the agency means unless it assumes s trategic interests to have a great importance on the country’s economic future. But all through the tortured journey of the deal over the last 18 months, the economy seems to have been none the worse for it. Moody’s shifts to familiar ground and warns that economic factors like failure of fiscal policy to battle inflation and external shocks could work against the country and lower its international rating at some future date.

The fact that government policy has not had the desired effect on inflation does not seem to have dented economic confidence or growth substantially. India is still a hot place for capital both as borrower through external commercial borrowings and a place to park dollars. Consider the kind of firms across the size spectrum raising capital in global markets and the consistent surge in remittances, to measure the distance India has travelled from not long ago when capital flew out, illegally. The western world is getting to be a pretty bleak place at the moment for capital but not the emerging economies. High interest rates, particularly in India, favour the capital inflows. But the blessing is mixed and both Moody’s and Dr C. Rangarajan, chairman of the Prime Minster’s Economic Advisory Council, would do well not to ignore the limitations of a policy of high interest rates as an anti-inflation measure. While the central banks of developed countries hold their rates steady, India’s high rates attract flows that have to be sterilised because the RBI also wishes to keep the rupee weak. In the bargain, the RBI adds to the liquidity which it then tries to skim off through upward adjustments in interest rates but with limited success as high interest rates in turn end up attracting fresh inflows. That is why the RBI’s repeated repo rate and CRR increases have not dented liquidity with money supply still above the acceptable range of 14-17 per cent. But they have contracted credit growth and raised interest costs for manufacturing.

Policymakers hope global prices will dip by fiscal end and inflation will fall to 5-6 per cent; so do we. But they could reassess currency and interest rate policies for their inflationary content.

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