Thanks to stubbornly high inflation, rising interest rates, as well as uncertainty over future income growth, consumer confidence has been on a continuous decline. This is reflected in the slowdown in sales volumes across consumption-linked and interest rate sensitive sectors such as automobiles, real estate, textiles, and retail. Despite the Reserve Bank of India, raising the policy rates for the 12th time in the last eighteen months to rein in inflation - measured by movement in wholesale prices - which still remains much above the central bank’s comfort zone. Following the recent hike in policy rates by RBI, the short-term lending (repo) rate stands at 8.25 percent while the short-term borrowing rate (reverse repo) is pegged at 7.25 percent. Meanwhile for the week ended September 10, 2011 the food inflation stood at 8.84 percent while the fuel price index stood at 13.96 percent on a year-on-year basis.

The industrial growth plunged to a 21 month low of 3.3 percent in July. The slowdown in the factory output, as measured by the Index of Industrial Production (IIP), is the worst since October 2009 when it grew at 2.3 percent amidst the impact of global financial crisis. The moderation in factory output will in all probability have a bearing on the economic growth during the current fiscal year which has been pegged at 8 percent by RBI. The GDP in the first quarter fell to a six quarter low of 7.7 percent.

The US Federal Reserve’s warning on the American economy triggered fresh fears of worldwide slowdown, and Asian and European markets tumbled following the drubbing on the Wall Street. The Bombay Stock Exchange sensitive index (Sensex), plunged by 704 points - the most in 26 months, to 16,361.15 points while Nifty lost over 200 points. Investors lost an estimated Rs. 2 lakh crore when the market tumbled. Besides, the weakening of the rupee against the US dollar to a new low in over two years is a cause of concern. At present the exchange rate is Rs.49.6 per US dollar.