Summary
In spite of a budget presented , which has pleased the farmers for the big loan wavers, and the income tax payers for the big relief in the form of reduction of the tax rates , the Indian economy is now facing serious challenges in the form of a slow down in economic growth , falling stock prices, increasing inflation, especially for foodgrains and energy products, declining export growth, increased real interest rates. The policy makers both at the Government and the Reserve Bank Of India are facing difficult dilemmas . This dilemma comes from the stagnation in economic growth on the one hand , and the increasing commodity prices on the other hand.The policies now taken are having serious implications for the Indian industry , the financial institutions, and the exporters , and the economy in general. When the Federal Reserve System has reduced the Federal target rates to near 2 % level, India has not reduced the rates fearing inflation.
Analysis
Indian real interest rates are the highest in Asia. The Reserve Bank governor Dr. Reddy , and the deputy governor Dr. Rakesh Mohan are inclined to further tighten the monetary policy by increasing the interest rates. The financial markets have started factoring this fear by falling bond prices, falling equity prices for the industry and the financial institutions.Also the markets are factoring in the fear that the RBI will allow a strong Rupee and hence the IT sector stock prices are falling. Dr. Reddy is a hard core monetarist , and Dr. Mohan is in industrial economist, recently converted in to a monetary economist. Perhaps India requires a different policy response to face the growth challenges and the commodity price inflation in the form of more supply side response to commodity price inflation , and aligning Indian monetary policy to the global developments , and looking for more maket signals in the form of the balance sheet growth of financial institutions to formulate the monetary policy rather than only on the traditional targets of the money supply and credit growth .
