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The domestic macroeconomic situation has been trying for the past 12-18 months, to say the least. GDP growth recovered from the low of March 2009 quarter, and inflation has been persistently high since January 2010, forcing the RBI to keep increasing the policy rates.
The balance between growth and inflation has now again tilted, with growth slowing to 6.90 per cent for the September 2011 quarter, compared to 8.90 per cent in the same quarter last year.
While growth seems to be moderating, reflected in the primary indicators such as IIP (Index of Industrial Production) and credit/deposit growth, inflation has shown a downward movement in November 2011.
However, inflation and inflationary pressures remain on account of global and domestic macroeconomic conditions. This is compounded by the rapid fall in rupee which has fallen 19 per cent against dollar and an average of 14 per cent against other currencies such as the pound, euro and yen since August.
The rupee seems to be facing challenges on account of the expected fiscal deficit as well as the outflow of dollars.
The Government's deficit indicators have worsened due to a decline in revenue receipts and increase in expenditure, particularly subsidies. The government looks likely to miss the 4.6 per cent fiscal deficit target. These factors will have substantial bearing on inflationary expectations.
The non-food bank credit and deposit growth rates have moderated.
Liquidity scene
In addition, the liquidity situation seems to have worsened with average LAF (liquidity adjustment facility) borrowings doubling from October to December, with banks borrowing an average of Rs 83,000 crore in December. The overnight call money rate has also hovered around 8.5 per cent in December.
Though the balance between growth and inflation seems to be tilting, inflation still continues to remain outside RBI's comfort zone, and while the regulator has taken a pause on rate hikes, it is too early to expect any loosening of the monetary policy.
It might take another quarter for inflation to fall within the comfort level. However, given the domestic and global macroeconomic situation and the reducing buffer between demand and supply, there are chances that inflation might recur. The data for the quarterly review in January 2012 will be critical for policy stance.
(The author is National Leader, Global Financial Services, Ernst & Young.)
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