Buffeted by an extraordinary global financial shock and many advanced economies close to moving into recession, India’s policy makers are grappling with options to keep growth intact while containing prices and infusing liquidity.
A specially constituted group headed by Finance Secretary Arun Ramanathan would submit an assessment report on liquidity requirements this week. India Inc, caught in an attack of sluggish domestic demand and surging input costs, could slide into a crippling profit squeeze with industrial growth slipping to a worrisome 1.3 per cent in August.
Industry sources warned that high costs for raising funds and slipping demand might hurt incremental investments, although projects worth $700 billion are in the pipeline over the next three years.
All eyes are now on the October 24, when Reserve Bank of India (RBI) governor D Subbarao presents the mid-term review of the credit policy.
“The Reserve Bank of India has taken action to inject liquidity into the system as warranted by the situation,” said Subba Rao. “We are monitoring the situation on a continuous basis, and stand ready to take appropriate effective and swift action,” Subba Rao said.
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The repo rate, the benchmark short-term lending rate, has been increased thrice since March 2007 and now stands at 9 per cent and many are expecting a cut in rates.
The country’s gross domestic product is likely to slowdown to 7.9 per cent in 2008 and slide further to 6.9 per cent in the next year, said the IMF's World Economic Outlook (WEO) released recently.
“We are projecting that the growth in India will come down from eight per cent in 2008 to seven per cent in 2009. But seven per cent is still a strong rate of growth,” Blanchard said.
Analysts did not expect a turnaround in the immediate future.
“We do not expect interest rates to soften in the short term, current tight liquidity conditions notwithstanding and demand conditions are likely to remain muted,” said Yashika Singh, head of economic analysis of consulting firm Dun and Bradstreet.