The recent Reserve Bank of India (RBI) monetary policy statement was another indication of conservatism by the Indian central bank. Growth in the economy this year fell to a decade low, profitability has tanked, and investments in the country have waned. But still the RBI kept rates steady, fearing that inflation would once again rear its ugly head. Any other central banker would have probably cut rates to stimulate the economy last year. Usually keepers of monetary policy succumb to pressure from lobbyists and the government. However, with deposit growth slowing the central bank instead chose to enhance liquidity measures including cutting the cash reserve ratio (CRR) and open market operations.
RBI Governor, D Subbarao has refused to listen to pleas from the government, bankers and investors to reduce interest rates. He has however kept a keen eye on the economy in order to see if there have been any changes in fundamentals. The central banker is also keeping close tabs on how the government goes about the process of fiscal consolidation.
All in all, the central bank governor's main priority is bringing down inflation. He believes that benign levels of inflation are necessary in order for the economy to sustain its growth over the medium term. While a cut in interest rates may not immediately result in increased investments into the economy, it will help improve companies' profitability.
But what may give India Inc reason to cheer is that it is widely expected that inflation may see some moderation next year. Supply constraints have eased and inflation is set to come off after remaining at high levels for a good part of 2012. Rise in prices of food items has been a major source of high inflation especially on account of unrelenting supply constraints in many protein items. Wholesale price-based (WPI) inflation hovered over 7% through 2012, down from 10% seen in the previous year. Despite various efforts from the RBI, inflation could still not drop below 7% which is still above the RBI's comfort level of 5-6%. But in the hope that inflation is expected to moderate further, the central bank has indicated that it may go for a rate cut in January. Well, if this is actually the case, 2013 may truly be a lucky year for India Inc.