Recent economic data continue to reflect the continuation of the strong growth momentum in the Indian economy. The key driver behind the accelerated growth rate is the industrial sector, especially manufacturing which has benefited from infrastructure spending, the improving competitiveness of Indian businesses, rationalization of import tariffs and excise duties and increasing credit penetration. Agriculture continues to remain sluggish in dire need of reforms.
With overall growth strong and global commodity prices high, inflation is likely to remain elevated. In addition to global commodity prices, a key driver has been food price inflation. Allowing the currency to appreciate could help mitigate the impact of rising international prices on domestic inflation. However, given the concerns over the impact of a strengthening rupee on Indian exports - especially at a time when the market is concerned over a U.S. slowdown - the RBI has not been very open to this option. In fact, the central bank has been actually intervening in recent weeks to stem rupee’s rise.
Given the sharp growth in credit and money supply at a time of still high inflation, the RBI has been concerned that the economy could be ‘over-heating.’ The economy’s strong growth rate and the appreciating rupee imply that the fundamentals for the capital inflows the country has enjoyed are merited.
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