• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Naina Lal Kidwai

While markets were expecting interest rates to be changed at the quarterly policy meeting, the lack of action should be seen in the context of the frenetic activity of recent times.

Indeed, the last three months have witnessed perhaps the most abrupt change in India’s monetary policy in living memory as Dr Reddy’s rate rises have given way to Dr Subbarao’s urgent rate cuts. The latter has involved 250 bps of cash reserve ratio reductions as well as a 100 bps repo rate cut.

I doubt if we have seen the last of the policy moves either. Although the RBI has rightly pointed to the success of its various measures in easing the immediate liquidity squeeze, interbank lending rates for more than a few days remain elevated. At the time of writing, for example, the two-week offer rate stands at 10.3 per cent, with the three-month rate at 11.7 per cent — both well above the 8 per cent repo rate.

Meanwhile, wholesale price inflation has clearly peaked, falling from a high of close to 13 per cent a few weeks ago to 11.1 per cent in the latest data for the week-ended October 11. It will make further downward progress as the sizeable commodity price falls dominate the impact of the weaker rupee.

Economic growth will also soften further as a result of the recession now underway in the developed world — which India cannot completely isolate itself from — as well as the delayed impact of the RBI’s previous monetary tightening, the full effects of which have yet to be seen. Together, these factors are likely to push GDP growth down to around 7 per cent later this year.

In my view it would be a big mistake to despair about the future of the Indian economy. Beyond the current cyclical slowdown, the outlook remains bright and it seems that markets are over reacting significantly now.

It is not the first time this has happened, while history suggests that when the bounce comes it could well prove powerful.

More Stories on : Monetary Policy | Credit Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line