It's going to be a defining moment for RBI to manage growth and inflation tussle simultaneously particularly since signs of higher inflation at such an early stage of the uptrend in the business cycle, is serious. By Vikram Kotak, chief investment officer, Birla Sun Life Insurance
India's policy response to the economic downturn has been very swift with RBI cutting repo rate by 425 bps in a span of six months and CRR by 400 bps in just three months.
With the economic recovery gaining ground, despite rising inflation, RBI went slow on withdrawing accommodative policy. It was a calibrated move given the risk of snapping growth which was in a nascent stage.
However, with robust pick-up in consumption demand, recovery in private capex gaining momentum, early signs of improvement in credit growth and inflation becoming more broad based than merely led by drought-impacted rise in food prices, it is time to move away from excessively accommodative monetary policy towards a neutral policy regime.
Along with the economy going through its second highest inflation phase in the decade, RBI also faces the challenge of managing highest ever net annual government borrowing programme in a smooth and non-disruptive manner.
Corporate and consumer credit off-take is likely to gain momentum due to improving consumer and business confidence.
Further, higher oil price will increase under-recoveries of down-stream oil companies and increase credit demand from this sector.