The government will have to carefully walk the wedge between the spectre of rising prices and the pressure on the Reserve Bank of India’s (RBI’s) to raise interest rates to sustain the nascent recovery seen in recent data releases.
The country is reeling under the impact of steep rise in a number of food items pummelled by a supply crunch in staple items such as potatoes, cereals and pulses.
Official data shows that wholesale prices of food articles have grown by about 15.58 per cent this year for the weekending November 14. The government had indicated that it would begin rolling back next year the stimulus measures introduced to counter a downturn, but also promised more economic reforms ahead.
The government and the RBI had announced a series measures including tax breaks in many products and interest rate cuts for help corporations to stay afloat.
Many of these measures, however, have left gaping hole in public finances, forcing the government to borrow a record Rs 4 lakh core (Rs four trillion) forcing macroeconomic managers to carefully walk the wedge between fiscal discipline and pushing for high growth.
RBI deputy governor Subir Gokarn said the economic stimulus couldn’t remain permanently and the next move, whenever happens, would surely indicate the government's exit.
“It's not a boom yet but it is indicating that we don't need to be in a sort of permanent stimulus mode ... the next move, whenever it comes will indicate a change,” he said.
All eyes are on the RBI now on when it announces measures to suck out liquidity from the system as focus shifts to controlling inflation. “Measures such as hike in cash reserve ratio or CRR to suck out excess money from the will probably be announced during December or January,” said Rajeev Malik, economist of Macquarie Group.