On March 15, 2011 in a paper entitled “Growth – moderation to come” I argued that domestic liquidity remains scarce, as the rise in credit has been higher than that in new deposits and the Reserve Bank of India was not done yet with monetary tightening. Two weeks later the RBI hiked interest rates by 50 basis points. More recently, the State Bank followed with a rise in lending and deposit rates by 75 basis points. Its benchmark prime rate now stands at 14% and the base rate, below which it will not lend, at 9.25%. This will affect both consumption and new investment. The Index of Industrial Production has been on a declining trend for several months and that for capital goods – an indicator of new investment – actually fell by 18.4% in February 2011. Whilst automotive sales have managed to cling on, it is unlikely that this buoyancy would be sustained in the coming months. Consumers will come under pressure with higher commitments and rising EMIs on home and personal loans. Purchas
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