Indian economic forecast : July 1994

Abstract

Boom conditions are prevailing in the economy but there is a danger of inflation raising its head again as the foreign exchange reserves go on increasing. The RBI s target of 55 billion of foreign capital which it can manage by open market policy will be breached very soon and the bank would be forced to abandon open market operations. With a flow of $ 5 - $ 10 billion, the RBI would be able to manage with some major changes in the monetary policy but a flow greater than $ 10 billion would force the government to go for full convertibility in March 1995. The government should take a bold step and reduce interest rates by another 2 to 3 percentage points. This would boost domestic investment, draw in imports and prick the ballooning foreign exchange reserves. It would also loosen the pressure on money supply and government deficit.