'Lower economic growth the new normal for RBI'

The Reserve Bank of India (RBI) could continue its monetary tightening measures by 25 basis points at least a couple of times more, despite the slower-than-expected industrial output of 4.1 per cent in August, the second-lowest in 17 months. The policy of monetary tightening in countries like India, China and South Korea also remains supported by the International Monetary Fund. Various policymakers have recently said, “Controlling inflation remains the main focus of monetary policy, and a premature change in the policy stance could harden inflationary expectations, thereby diluting the impact of past policy actions”.

The central bank’s focus would remain on inflation management, despite looser monetary policies elsewhere across the globe. It has clearly accepted the ‘new normal’ of lower growth for India. We expect the growth to move close to 7-7.25 per cent during 2011-2012, and the investment climate to be sluggish due to delays in policy actions, the renewed global uncertainty and the less favourable external financing environment. The answer to economic growth is not just a pause in interest rates. The real killer for growth is government inactions, which have failed in their job of boosting confidence and fostering a positive investment climate through its appalling policy inertia. They have also failed to resolve long-standing supply issues to cool prices.

India’s services sector contracted for the first time in more than two years, as new business dried up and expectations weakened, amid concern over a flagging world economy. We might see downgrades from leading credit rating agencies for India if we continue to see such fiscal slippages and deficits increasing, along with falling exports and increasing import bills.

So, the million-dollar question remains what should an investor do in the current environment? We see the next six months as very tough for Indian companies, with the rising dollar, interest, input costs and foreign currency convertible bonds due for repayment. With uncertainty still prevailing in the market over the bail-out of European countries and poor Indian fundamentals, it makes sense to buy slightly higher in a clear market environment, rather than averaging out in a cheap, but uncertain market. Of course, considering this, we do expect the rupee to inch towards the 50-plus level against the dollar, and the Sensex to hit the 15,000-mark soon.

The writer is chief executive officer, India Forex Advisors