When the global financial crisis was at its height, central banks around the world scrambled to loosen their monetary policies. The reason? They wanted to spur consumption and prevent recession from hitting them hard. India too went in for monetary loosening as growth of the Indian economy slowed down. But India had another problem to contend with. Poor monsoons hit agricultural production hard. And so food prices and consequently inflation shot up.
With the threat of inflation on one hand and slowdown in economic growth in the other, the RBI finally decided the former posed a much bigger threat. And so in the last few monetary policy meetings, the central bank announced several rate hike measures. The developed world meanwhile is still contemplating rate hikes. This is because they have yet to recover completely from recession. However, fear of bubbles forming all over again has put pressure on the rich world to slowly start hardening rates once again.
That seems unlikely now with the debt crisis worsening in Europe. India, however, does not intend to pause its rate hiking measures. The Finance Minister Pranab Mukherjee is of the view that the deepening debt crisis in Europe could hit India's and other emerging economies' exports and growth. But he maintains that this is not going to stop India from gradually reversing its loose fiscal and monetary policies.
India's GDP grew by 7.4% in FY10 as compared to 6.7% in FY09. This highlights that India has recovered well from the crisis. Not just that growth in agriculture was flat. This much better than the decline in growth that was initially envisaged. In the meantime, inflation continues to be a worrying factor. And so, it is hardly surprising if the RBI sticks to its guns and continues with its tightening measures.