It seems that the softening interest regime eagerly awaited by India Inc. will be difficult to sustain in future. There have been only two rounds of rate cuts of 25 basis points each till now. But there is already a simmering sense of disagreement with respect to the haste shown in slashing rate the second time after the Union Budget 2015-16. If reports are to believed then some senior officials in RBI were concerned that the rate cut has come at a time when there is no clarity on the state of the economy or inflationary pressures. The worries have been further compounded by the fact that RBI will have to be more accountable for achieving inflation targets in future.
Even the International Monetary Fund (IMF) has stated that the food inflation in India is likely to rise with recovery in economic growth unless measures are taken to increase farm productivity and investments. The IMF has projected average consumer price inflation of 6.3% for FY16 as compared to a less than 6% target set by RBI for January 2016. India Inc. appears to be on the same page with respect to likely inflationary pressures in future. As a result its business confidence has slipped to a one-year low in February 2015.
Easing inflation had set the tone for rate cuts by RBI. However no concrete steps have been taken by the government so far to increase growth rate of agricultural gross domestic product that has remained in low single-digits. Thus food inflation is likely to rear its head again with a pick-up in private consumption. In such a scenario, RBI has a limited role to play in controlling inflation. Therefore the government needs to address the real problems of enhancing food supply and eliminating price distortions through market-based pricing in order to rein in long term inflation. Until then, India Inc cannot afford to rely only on rate cuts to propel the economic engine.