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Tighten or Perish
The Indian economy will soon fall into the clutches of stagflation unless it says good by to its expansionary policies. The mix of huge deficit and low interest rates is good for crisis management. Not for ever.
Red signals dot the economic landscape. The bench mark inflation rate at 0.7% is racing to overtake 5 or 6% by March. Food prices are up 15% and industrial goods 11.7%. The production of consumer goods trails industrial output.
Banks are jittery. Bond yields are down and mark–to-market loses are on the cards. They will take more of those unwanted bonds when the government comes up with plans for $90 billion. So less funds for normal lending. Productive sector will suffer. Time to roll up interest rates cuts. Inflation otherwise will go out of hands. With industrial activity in slow motion stagflation is inevitable.
The government is not to step back. It wants stronger inflationary pressures around before changing gear. The rupee strength, however, is clear hint that the market is not taking such brave words at face value.
For the moment, it is destination India for global investors. Most of the capital that went out in the wake of the crisis has returned. So bubbles are seen on the surface. The Sensex is peaking. The repackaging of the interest rates, upto 4.2% or more will, certainly hit the market. But that, in any way, is better than a bust later.