Interest rates have been falling through this year. As the RBI’s monetary policy committee met last week, consensus was trying to decide on how much the interest rates would be cut. It arrived at a cut of 25 bps. The RBI decided not to reduce interest rates. Instead, it chose to reaffirm its accommodative stance, indicating a willingness to reduce rates further if supported by data and necessity.
This puts the focus back on inflation. We must see the onion price spike reverse and also hope other food items don’s see sharp spikes in prices. We also need to see oil price contained at reasonable levels. The economy needs to manage inflation well in the coming months and ensure that we have scope for a rate cut in February when the RBI meets after the budget is presented.
Between now and February, a lot of things will be set on course. FIIs will decide their EM strategy and within that their India stance. The last three months saw continuous net inflows from FIIs. November was particularly positive with the year’s best inflows of 3.2 billion dollars. With the growth forecast significantly downgraded, the FII flows in December are very crucial. This will give us a sign of things to come.
Clearly, we are in a growth slowdown, this also means that we are going to see the government attempt drastic steps to stem the tide on investor sentiment. Disinvestment is a big driver. Success in selling away entire companies holds the key to the next phase of reforms. Personal tax reforms are a sure-shot way of changing the investors’ mood to spend, save, invest and grow. After all, growth can only be created on the bedrock of public optimism. The government will now need to swiftly move on many fronts and investors should be early in picking up the positive signals.
