What Reserve Bank of India governor D. Subbarao says on Tuesday will perhaps be more important than what he does.
Bankers and business houses have already begun complaining about high interest rates, but most economists and financial market participants are expecting the Indian central bank to continue its fight against inflation by increasing its key policy rate by 25 basis points (bps). That would be a sensible course of action since wholesale prices are still growing at around double-digit rates. Food inflation has begun its downward journey in recent months, but core inflation and the inflation expectations of households are still far beyond safe limits.
Subbarao is also aware of the fact that the economy is slowing, but the time to shift focus from battling inflation to supporting growth has not yet arrived—unless a financial shock emanating from either Europe or the US upsets all calculations. While Union finance minister Pranab Mukherjee is yet not prepared to move down the official growth estimate for 2011-12, most private sector economists expect the Indian economy to expand by around 8% this year, around 1 percentage point below early estimates.
Analysts will watch out for indications in the policy statements about how far interest rates are from their peak. Around 50-75 bps is a fair estimate, which means that we should see two or three more interest rate hikes by the end of December. There are already signs that the 10 interest rate hikes since March 2010 have finally begun to squeeze consumer demand, going by sales trends in sectors such as automobiles and housing that have significant multiplier effects on commodities such as steel and cement.
By Shyamal Banerjee/Mint
Weaker demand is likely to keep inflation in manufactured goods in check. Even though inflation will not fall appreciably in the next few months, it is quite likely that it would be around 2 or 3 percentage points lower by March 2012. The new normal will still leave inflation at a level far above the comparative number for most other major emerging markets.
But that is a problem that cannot be solved without active help from the government in New Delhi, through a new reforms drive and a tighter fiscal policy. Neither is on the horizon right now.
Inflation control or growth: what matters more for the Indian economy today? Tell us at email@example.com