The Prime Minister recently spoke at the RBI's platinum jubilee celebrations. He applauded the central bank's proactive stance that kept India away from the direct impact of the global financial crisis. As he said, "Ensuring that the Indian financial system remained stable in these very difficult times was a major achievement in financial and economic management."
There's no denying that the RBI has played a wonderful role in protecting the Indian economy when all hell broke loose worldwide. But as we stand now, it is facing a dilemma of sorts. As the economy revives and recovers, inflation is rearing its head again. This has forced the RBI to rethink its low interest rate stance. But on the other hand, higher rates are seen by many as putting a spanner in the growth momentum.
So the RBI is in a fix! While it recently took some of its rates higher, its decision was mixed with caution. But with inflation not looking to drop down anytime soon, it is expected to raise rates further in the next few months. How impactful will this be for India Inc. is yet to be seen. We believe that with the Indian economy flush with cheap global and local money, and Indian companies not being as aggressive on expanding capacities, a slightly higher interest rate won't really impact the growth momentum.
Higher interest rates is not what we believe is the biggest concern for the Indian economy currently. A bigger issue is the economy's absorptive capacity of the cheap money that's flowing in from the foreign markets. What we have seen in the past is that higher foreign inflows have led to bubbles in the Indian asset markets - like property and stocks. What India wants is that a large part of these inflows are used to create proper infrastructure within the country. Not to create asset bubbles!