India facing low growth with high inflation: Moody's
14 June 2012
The Indian economy is facing stagflation, or high inflation against low economic growth, global financial services and ratings firm Moody's said today.
"India's economy is in stagflation, with notably weaker growth but inflation still stubbornly high," said Glenn Levine, senior economist, Moody's Analytics - an arm of Moody's Corp dealing with economic and consumer credit analysis, credit research and risk measurement, among other things.
The agency pointed out that the wholesale price-based inflation has ticked up to 7.5 per cent year-on-year in May due to supply-side factors. This will cause ''further headaches" to the Reserve Bank of India, it said, while suggesting that RBI had no alternative to reducing policy rates in its next monetary policy announcement, due next week.
"With the inflation numbers now being driven by supply-side factors and the currency being pushed downwards ... and India's weaker growth prospects, we think that the RBI could cut rates without putting too much upward pressure on inflation," said Moody's Analytics.
At the same time, it acknowledged that RBI cannot be "too aggressive" while inflation remains a problem.
Moody's said the recent plunge in the rupee is pushing up prices, especially of imported of goods and commodities priced in US dollars.
It further said with the rupee now at 15 per cent below its peak of late-February, inflation measured by the wholesale price index will remain in the 7-8 per cent range for another six months.
"With the growth side of the economy slowing, the risks have shifted sharply towards growth and they (the RBI and other policy-makers) should just grin and bear the higher inflation numbers," it added.