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Budget Day – Will the government bite the bullet?


Growth-inflation dynamics have always been a tough act to balance. Policy actions over the past one year have been guided more by inflationary concerns and the mid-quarter review of monetary policy this morning was no exception. With inflation as the main guiding factor, the meet was a non-event.RBI keeps key rates unchanged and “considers credible fiscal consolidation, an important factor in shaping the inflation outlook.” The policy bent reiterates no further tightening to take place but the quantum and timing of rate cuts remain uncertain due to inflation risks that still remain.

Surge in crude oil prices, fiscal deficit and a depreciating currency keeps the RBI worried on the upward risks to inflation.

The Central Bank’s primary concern has been about stability on the macro-economic front – inflation, funding the current account deficit and a worsening fiscal situation. Surge in crude oil prices, fiscal deficit and a depreciating currency keeps the RBI worried on the upward risks to inflation. Besides, administered prices of fuel, power and fertilizer keeps significant amount of inflation suppressed. Uncertain global environment adds to the worry, as this puts further pressure on the current account deficit that would be a challenge to fund were global commodity prices to rise.

Amidst worrisome fiscal and liquidity situation the focus shifts to Budget day on 16 March, 2012, a critical inflection point for the market. Recent debacle in the state elections has raised doubts about this government’s ability to go for major reforms. Will it bite the bullet and turn the crisis into a moment of opportunity or will the budget too be a non-event. We will have to wait for tomorrow to find out!

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