Hemmed in by an unprecedented liquidity crunch, poor credit availability, falling rupee and low business confidence, authorities are grappling to trash out the appropriate policy matrix in an election year.
The monster of inflation is still in double digits though stable and looking under control. Benchmark wholesale-price-based inflation rate slipped to 11.44 per cent in latest data. The government must ensure growth with manageable inflation.
The rupee fell to a new low of Rs 48.82 to a US dollar and analysts cautioned the domestic currency could slide further in the wake of rising demand for the greenback to foot a growing oil import bill. A stronger rupee makes imports costlier, and could fuel inflation – or the fiscal deficit, if the government uses handouts to control prices.
“The volatile tendencies are going to continue and foreign institutional investment outflow will remain large. Sentiments and fundamentals are weak and will continue to remain weak,” said Madan Sabnavis, chief economist of National Commodities and Derivatives Exchange (NCDEX).
The Reserve Bank of India has so far pumped in Rs. 1,65,000 crore more into the banking system to help their liquidity needs and carry on lending, and made deposits more attractive for non-resident Indians.
“Due to high world oil prices until July 2008 and the recent depreciation of the exchange rate, growth of imports is expected to be much higher than last year,” said N.B Bhanumurthy of the Institute of Economic Growth. The cash reserve ratio (CRR) –the share of deposits banks park with the RBI—now stands at 6.5 per cent, has been cut thrice in the last fortnight.
“Further cut in CRR up to 1 to 1.5 per cent would be needed to meet the short-term credit requirements to the tune of about $ 40 billion from now to March 2009 on account of working capital, trade credit and other short term credit,” Confederation of Indian Industry (CII) director general Chandrajit Banerji told Hindustan Times.
The government on Wednesday announced doubling the ceiling on foreign institutional investor (FII) investment in corporate bonds to $6 billion, opening up a new avenue to strengthen resources to sustain growth and investment in the economy.