Column : Letís not get ahead of ourselves
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Now, let's project forward. High-frequency indicators suggest growth has bottomed and a modest re-acceleration is on the cards. New export orders suggest a meaningful export pick-up in the coming months. A strong rabi crop should boost rural demand and, in a year peppered with eight state elections leading to a general election, it's hard to imagine public finances being austere. All this suggests that a consumption and demand-led recovery could characterise 2013. It will likely be a modest recovery, but even a modest one will likely re-open positive output gaps at a time when there are no signs of an investment pick-up. If this scenario, which is increasingly likely, plays out, inflation may re-accelerate in the coming months.
But all this is very much in the future, right? What prevents aggressive easing now? Quite apart from the fact that monetary policy has to be forward-looking, there are other considerations that the central bank will not be able to ignore. CPI inflation is in double digits, deposit growth is at a nine-year low, and gold imports continue to surge such that the FY13 current account deficit (year ending March 2013) may even beat last year's record and print close to 4.5% of GDPóalmost twice as mush as is deemed sustainable in the Indian context.
And these are not unrelated facts. Stubbornly high retail inflation has meant that depositors continue to experience excessively low or negative real rates of return on financial assets in India. As a consequence, deposit growth continues to suffer (although, admittedly, it is also being impacted by the low growth of base money creation over the last year) as households are making a perfectly rational portfolio allocation by demanding ever larger quantities of gold. True, the demand for gold also has speculative origins, but there is undoubtedly a powerful inflation-hedging motive as well.