Growth, inflation and financial stability -- tough choices

(Sanjay Sinha is the CEO of DBS Cholamandalam Asset Management Ltd. The views expressed in this column are his own)

By Sanjay Sinha

World over, the first set of noises are being made to herald the end of easy monetary policy.

The Reserve Bank of India (RBI), in its credit policy announced on Oct 27, has rolled back the 1 percentage point of leeway that it had extended in the statutory liquidity ratio (SLR) in Nov 2008 by bringing it back to 25 percent and has announced an enhancement of bank's provisioning norms to 70 percent in a graded manner over the next one year.

There is now a consensus view that we will see a hardening cycle begin from Jan 2010. The Finance Minister, the Commerce Minister and the Deputy Chairman of the Planning Commission were quick to jump in and assuage fears by announcing that it was too early to roll back the stimulus measures.

RBI is conscious of the fact that inflation will very quickly move up to 5-6 percent territory, largely driven by food prices while base effect will also play a villainous role. Despite political noises, RBI will need to act.

Globally too, things seem to be warming up with U.S. Treasury Secretary Tim Geithner announcing that the $800 bln stimulus buy back plan will be concluded and we need to brace ourselves for some rate hikes now. This was enough to send a shiver down the spine of financial markets.

The larger school of thought believes that we are not out of the woods as yet. The spectre of a double dip recession still haunts. How else will you explain that Citi Bank has opted to hoard $244 billion in cash reserves.