Easing interest rates may not be an easy task for RBI

Voices forecasting interest rate cuts by the Reserve Bank of India is getting feebler by the day. Indeed, there are odd ones calling for even a rate rise.Slowing economic growth, rising prices, sliding currency and deteriorating government finances may possibly throw up a deadly cocktail - stagflation - a state of low growth and rising prices. If the government takes a leaf out of oil companies' decision last week to raise petrol prices, and follows up with increasing diesel, cooking gas and kerosene prices, inflation rate may jump to double digits making talk of interest rate cut meaningless. Even if economic growth rate falls to multi-year lows the Reserve Bank of India could not ease rates aggressively for fear of fueling inflation, one of the factors that has halted investments. The government does not have the fire power either to provide fiscal stimulus. Complicating decision making is the growing imbalance in the financial system where deposits growth is at a 7-year low. RBI's sale of US dollars to arrest the Rupee slide is sucking out rupees from the system and inflation is eroding savings. Of course, a financial catastrophe if Greece exits the Euro zone could turn the argument in favour of series of rate cuts.