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Indian Monetary 'Shock Therapy' to Slow Economy - ASHARQ AL-AWSAT English Archive
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NEW DELHI (AFP) -Aggressive anti-inflation moves by India’s central bank will slow scorching economic growth but are unlikely to result in a “hard landing,” economists say.

The Reserve Bank of India surprised markets late last month when it sharply tightened monetary policy, alarming industry which forecast a demand downturn and dismaying borrowers whose housing, car and other loan repayments jumped.

“They pressed on the brakes a bit hard, but there’s no indication that this is going to produce any kind of serious slowdown,” said D.K. Joshi, economist at Indian rating agency Crisil, citing the economy’s core robustness.

“This year we are looking at growth of 7.9 percent to 8.4 percent down from 9.2 percent in the last year (to March 2007),” he added.

India’s growth has been the second fastest in the world and pushed inflation to two-year highs, hurting the purchasing power of its poor masses.

Still, economists said the central bank must tread carefully in tightening further to combat inflation, now running at 6.39 percent, nearly a percentage point above the bank’s tolerance ceiling of 5.50 percent.

JPMorgan economist Rajeev Malik noted the cautionary example of monetary tightening in 1989 by the Bank of Japan “that burst the property bubble, pushing the economy flat on its back for the next several years.”

“The door to the infamous Hall of Fame of policy mistakes is wide open,” said Malik, who called the latest moves by the bank “shock therapy.”

The bank lifted a key lending rate by 25 basis points to 7.75 percent — the highest in over four years. It also hiked the amount of cash commercial banks must hold on deposit by 50 points to 6.50 percent as it sought to suck out cash and curb rampant credit growth — its third such increase in four months.

The bank has been tightening steadily since late 2004 to subdue inflation.

Cutting prices has also become a priority for the Congress government after the rising cost of living was cited by analysts as key to its defeat in two state elections in February and its drubbing in New Delhi municipal elections on the weekend. Indian voters are notoriously price aware.

The bank said its latest tightening was prompted by a need to take “determined action” to fight inflation and its hawkish tone has spurred speculation more tightening could be in store at its policy meeting April 24.

T.K. Bhaumik, economist for India’s biggest private company Reliance Industries, said authorities should be wary of tipping India into recession.

“When we had a long period of economic recession beginning in 1996-97, the trigger was the preoccupation with inflation,” he said.

The bank’s latest action also may have been unnecessary as it came when its tightening medicine appeared to be finally working, economists say.

It made it look like it had “lost its cool at the wrong time,” Malik said.

Most economists expect inflation to fall below six percent in April.

Investment bank Goldman Sachs forecast growth would slow to eight percent this year, but cautioned its projections were “skewed to the downside due to the aggressive tightening, especially if it were to continue for much longer” or a poor monsoon.

The bank said, however, it did not expect the economy to “have a hard landing as there is underlying strength in the economy, business confidence is still high and capacity expansion is in progress.”

Finance Minister P. Chidambaram has forecast another year of nine percent growth and added he is confident of wrestling down inflation to between four and five percent.

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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