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Finance Friday: India to begin winding up stimulus soon

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The Indian government continued to give out strong signals over the weekend about its intention to wind up fiscal stimulus initiatives and cut back on its loose monetary policies. At the India Economic Summit in Delhi yesterday, Prime Minister Manmohan Singh expressed his view that there are now very clear signs of recovery in the Indian economy. And thus, the stimulus packages that were resorted to during the financial crisis would be wound up by next year.

Indian Economic Recovery

This comes close on the heels of the RBI raising the statutory liquidity ratio (SLR) to 25% from 24% on 27th of October, thus effectively sucking out some of the liquidity from the system, by ordering banks to mandatorily keep more of their cash parked in government bonds. Additionally, the RBI governor has commented that it is now appropriate for the central bank to exit monetary stimulus in a calibrated way.

And with this India may become one of the first G20 nations to begin winding up its fiscal stimulus as policy makers from other countries like the US, Japan and Australia are hesitant to withdraw any of the measures taken to prop up an economic recovery.

But India’s concern for a timely withdrawal may not be misplaced. This is because there is the utmost need to conduct the country’s interest rate policy with foresight instead of hindsight. In other words, we cannot afford to wait until inflation picks up pace to wind up our current loose policy stance or else it might turn out to be too late. Demand in India is has already picked up to some extent and so has the benchmark inflation (wholesale price index, WPI) which has slowly but surely been rising in the past few weeks.

It remains to be seen whether the RBI retains its repute of being the central bank with the best foresight in the days to come.

[ This Finance Friday post is brought to you by Equitymaster– India’s leading independent equity research initiative]

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