The coming months are not too bright either for the economy or inflation as the Reserve Bank has revised growth projections downwards to 6.5 per cent from 7.3 per cent, and inflation rates upwards to seven per cent from 6.5 per cent.
The erratic and deficient monsoon can see inflation rear its head, particularly in coarse cereals, the staple food of economically weaker sections, and pulses, the poor man’s source of protein. Non-food items will also face pressure as fuel prices rise, the rupee depreciates and infrastructure bottlenecks in coal, minerals and power persist. Interestingly, commodity prices could rise if the US Federal Reserve and the European Central Bank come out with quantitative easing programmes. Some of this money could go into speculation in commodities, and that will be bad for India. Besides, persistent problems in the eurozone and weakening growth in the developing economies as well as Brics countries will impact the Indian economy.
The RBI has reiterated that it takes two to tango, and for its monetary policy to have effect it has to be accompanied by fiscal measures. The government has to improve the investment climate by addressing the bottlenecks and removing constraints on foreign direct investment, it said. But industry should be happy as the RBI has cut the statutory liquidity ratio (the money that banks keep in any form: cash, gold and unencumbered approved securities) by one per cent to 23 per cent, which will ease liquidity and is a stimulus to banks to lend.