India Economy: Policy falling behind developments

Friday, March 20, 2009

Two years ago, inflation was  set to roar as a result of the congress-led UPA administration's populist, profligate budgets.  Yet the RBI stood around benignly watching and mimicking the words of the spendthrift FM.

The result was out of control inflation and resultant poicy action to increase rates to rein in price, the RBI is again falling behind the curve.

It is incumbent on policy makers to anticipate economic developments and make pro-active policy moves.  We are now heading to real interest rates of 10+% and yet RBI is sitting around waiting for ...who knows.

Clearly, deflation is here and will be around for some time..I expect inflation in India to head for -2.5% in the next few months...under these circumstances borrowing at 8 or 10% is a an impossible proposition for business...

We need a sharp reduction in policy rates followed by sharp reductions in PLR and loans for housing and cars...without these policy moves expect further deceleration of GDP to the 3%+ level...job losses and bankruptcies will fill headlines. 

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