The decision by European leaders to diffuse the crisis in Greece and the US GDP growing at a pace of 2.5% have come at an opportune time for the global economy. The double dose of good news has brought cheers to the markets back home the stock exchange, the economic barometer, surged by 516 points. However weak business sentiment and persisting high inflation are undoubtedly impacting the domestic economy. The economy, which recorded a GDP growth of 8.5% in 2010-11, is expected to moderate to about 8% in 2011-12, as against 8.75-9.25% projected in February. So much so that during the first quarter of the current fiscal the growth slipped to 7.7% from 8.8% a year ago. However, the Finance Minister believes that despite the moderation in growth in the current fiscal, the fundamentals of the economy are intact and that the medium-term growth prospects remain buoyant. The government’s commitment to fiscal consolidation implies that unlike 2008-09, there is no elbow room for economic stimulus this time. While there are enough signals that the global economy is on an accelerated path to recovery; the double digit inflation and policy measures taken by the government in India still remains a matter of concern.
The monetary measures adopted by the Reserve Bank of India, has failed to rein in inflation. The RBI in its monetary policy review on October 25, 2011 has once again raised the policy rates by yet another 25 basis points- the 13th time since March 2010. Banks will eventually increase their interest rate on home and auto loans and consumers will have to keep aside a bigger amount as EMI outgo. For the week ending October 15, 2011 food inflation was pegged at 11.43 percent. While the double digit inflation is bound to hurt one and all; the increasing policy rates and its implications (higher cash outgo) puts further pressure on organizations to review their compensation structure. This will undoubtedly increase the cost of labor and hence organizations need to look at other avenues for cost rationalization. If the double digit inflation and hawkish monetary policy stance continues through the present quarter too; it is very likely that profit outlook for organizations will take a dip owing to increased cost of capital and employee retention.