Wednesday, January 25, 2012

Where do we go from here?

I know it's too early, nonetheless, cheer I want to.  RBI after a long haul, decided to tilt its focus towards growth as inflation seems to be behaving itself. Also with rupee continuing it's upward move, RBI can now breathe easy and release some liquidity (Rs 32k crore to be precise) back into the system (some of which it may have sucked while intervening to stop rupee's slide).  The move to cut CRR by 50 bps is a precursor to interest rate cuts; however RBI has adequately warned that interest rate cuts will be highly dependent on inflation remaining under control (core - 7% or under), fiscal consolidation and conducive investment environment.  

Growth (GDP) projection for current  financial year has been brought down from initial 8 to 7.6% and now to 7% while inflation forecast is kept unchanged at 7% for Mar '12. Also, RBI  deputy Governor has indicated that  rupee curbs are not likely to get rolled back in a hurry; it  fears that rupee recovery could be temporary.

Markets cheered RBI's move to ease liquidity; sensex crossed 17k mark and USD/INR tested sub 50 level. Market is looking at another CRR cut (albeit smaller) in March  if  advance tax flows tighten liquidity condition and another cut during its April policy.  We may see gradual rate cuts beginning April, however RBI will take cues from budgetary measures towards fiscal consolidation.  Let's hope for a pro-growth budget!

While we have a lot of fixing to do internally, a lot also depends on what happens in Euro region which is the epicenter of the current crisis. Will ECB prove to be lender of last resort and even if it chooses to be, can that become a solution that calms markets permanently?  Situation looks fragile and precarious.  IMF has lowered growth forecasts for most parts of the world.   

It's a complex and interconnected world and current crisis has affected capital flows into emerging market.  The impact of growth slowdown and increasing unwillingness to lend / risk aversion by banks is reflected in lower credit off take and hence growth in itself.  It's a vicious cycle.  It would take more than an organisation or a country to pull Euro region and hence our world out of trouble!  A lot depends on collective measures from countries in order that the contagion is contained.

"Where do we go from here?
I want the whole world to show
Where do we go"

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