My assignment for the day: write 200 times “Next time I will not get too excited when I write about India’s short term economic situation.” For those who have been following India in the past few days, the developments seem anything but the rosy picture I painted last time around. Sure, in the long run, India is still poised to have solid and sustainable growth. However, their current battle with inflation may be more than just a bump in the road.
The rupee has been slammed in the past few days, as many see the Reserve Bank of India (RBI) having made insufficient actions, and being too slow to respond. The rupee’s fall is testament to the economy needing more rate hikes in order to limit its rapidly rising inflation. Limiting inflation is seen as being one of the keys to fixing the myriad of problems in India’s economy: a rising budget deficit, a current account deficit, a weak rupee, rising import costs (including energy), and diminishing spending power. However, concerns exist for the RBI (similar to the worries of the U.S. Federal Reserve) when considering rate hikes: the role of energy costs and the related adverse effects of rates that are too high.
So, let me revise my earlier statements. In order to correct the problems that their country is facing, the RBI should (and most likely will) continue to raise rates. As they are very dependent on oil imports, it would be a very worthwhile long-term goal to try to utilize alternative energy sources. As the country is still becoming industrialized, by pursuing these alternative energy methods while the country is still growing, the new energy sectors could grow along with the country. Finally, most analysts are saying that India is not in the same position as it was in 1991, when it suffered another economic downturn (and rupee devaluation). In other words, though the Indian economy may suffer a downturn or even a recession, India is still well situated — as long as they utilize smarter monetary policy — to stabilize and expand in the future.