On hold for all the right reasons

On hold for all the right reasons

Reserve Bank of India’s (RBI) policy review on Tuesday continued from where it had left off in June: holding rates on inflation concerns. This time it wasn’t as dramatic a decision as in June when the market had completely convinced itself that a rate cut was cast in stone. Rather with fears of inflation turning rabid on higher food prices given the weak monsoon, the market had resigned itself to no rate cuts this time.

As RBI has been exhorting for long, the solution lies with the government. But the government’s continued inaction suggests it has decided to live with 5-6% growth and 7-8% inflation till the 2014 elections rather than throw down the gauntlet to coalition partners. There is one small problem with this strategy. Muddling through is a dangerous objective to base policies because sooner or later the market will run out of patience and force a crisis. And we have seen plenty of examples of this in recent times. What could trigger this in India? Probably when the credit rating agencies pull the trigger and downgrade the country to junk status.

Jahangir Aziz is chief economist, India, JPMorgan Chase & Co

The views expressed here are personal.

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