With the latest RBI move on rates, the operating policy rate is now higher by 475 bps since the beginning of RBI's current rate hike cycle. This, coupled with improved transmission levels to the real economy, is likely to result in a sharp slowdown in growth over the next couple of years.
Given the backdrop of immediate sovereign debt issues in Eurozone, the near-to-medium term fiscal issues in US and high and volatile crude oil prices, we are living in uncertain times. The domestic growth concerns will thus be impacted by both external and internal factors.
Inflation in all three components – food, fuel, and manufactured products — is expected to remain at higher-than-RBI-comfort-zone levels. There is evidence that inflationary pressures are expected to persist for some more time; the issue is that this has been partly factored into the monetary policy and partly not.
In the absence of complementary demand and supply side as well as fiscal actions, monetary policy is bearing the responsibility to control inflation.
With the Central government looking likely to overshoot its fiscal deficit target for the year, the resultant higher government borrowings are also weighing on inflationary pressures. With the RBI not amenable to view this elevated inflation level as a “new normal” for the economy, it is, an appropriate time for the government to remedy structural supply-side bottlenecks.
The hawkish stance enunciated by RBI definitely doesn't indicate any near-term end of the road in the monetary tightening stance. A change in the central bank's monetary stance appears a little more distant now, with the RBI clearly stating it will wait for signs of sustained downturn in inflation, before changing its current stance.
With previous transmissions still getting effected, and the current higher-than-expected hike yet to be transmitted, we seem to be staring at continued increases in general interest rates across the economy during the current fiscal. Couple this with the possibility of some more monetary action in the coming months, and the impact would continue into fiscal 2013.
(The author is Chief Executive – Financial Services, Aditya Birla Group.)