To exit or not to..

Continuining with what Ankur posted, i thought it will be more relevant to see the overall monetary and fiscal position. So i tried to delve in the issue and tried to find out what needs to be done on both the front. Loose fiscal policies are hurting the fiscal position while a tighter monetary policy might risk growth. Last week, finance secretary came out with a statement that too much of stimulus is injurious to health. This indicates the view from some quarters that it is time to withdraw the stimulus. However i feel that the withdrawal of the stimulus should be gradual and in a phased manner, in order to ensure sustained economic recovery.

Govt should wait for the data of 3rd quarter to come and then see if the revival is taking place. Most of the sectors like automobile, real estate have grown in the past two quarter because of the low interest rate regime as mentioned by Ankur in his post.
Hiking the interest rate at this juncture could hamper the gaining growth momentum. Usually, the pick-up in credit off-take and its growth beyond a certain point signals over-heating of the economy, and thus indicates the need to tighten the monetary policy .However the credit off take has been relatively subdued which indicates to keeping the interest rate regime soft in the short term. The rising inflation rate in the country is mainly because of the rise in the prices of food articles. Thus whether monetary policies can deal with these supply side issues is questionable. The immediate task of the government should be to augment the supply of essential commodities.

However high liquidity in the country is an area of concern and it could lead to too much money chasing fewer resources. The RBI can raise the cash reserve ratio, mopping up surplus liquidity. But it should not raise interest rates at this stage, when a double-dip recession is still a possibility. If, instead, the world economy strengthens, and non-food inflation accelerates in the next six months, that will be the right time to hike interest rates.

The govt should set its priority for fiscal consolidation. The 6 % cut in excise duty and 2% in service tax should be rolled back in a gradual manner, probably by a percentage point each from the first quarter of FY10. The revenue of exchequer will improve and the interest burden of govt wiil come down. One of the most important moves in the fiscal font should be to reduce the wasteful expenditure as announced by govt in nov, austerity drive must be implemented. This would help the country to return back to the fiscal target of 3% by 2012.

Tighter policies are definitely around the corner, the only question is the timing.

Now with the nov iip figures at 11.7, are we looking at a 50 basis point hike in repo and reverse repo?? Will the RBI think that the industry may no longer need the stimulus offered in the form of low interest rates? Only time will tell.....