Mr Chidambaram aims to confound everyone in this country and abroad by demonstrating his capacity - whatever the means - to hold down by the end of the year both fiscal and current account deficits to perhaps even below the set targets of 4.8 and 3.25 per cent of GDP respectively. To talk of any “crisis” is detestable while everything is being done to steer the economy through the “spillovers” from the murky global environment.

Righteous anger over IMF’s daring under-estimation of India’s growth at 3.8 per cent in 2013-14, with a similar riposte on “Unconventional Monetary Policy” in USA in disregard of its negative impact on developing economies, marked Mr Chidambaram’s speeches in Washington recently.

On UMP, emerging market countries like China, India and Brazil have talked both ways. At first, in principle, its de-stabilising effect on economies and exchange rates was forcefully voiced. But having settled for it, now the chorus of protests is over any sudden unwinding of this ‘quantitative easing’ policy of US Fed - the first hint in May having caused market turbulence and capital outflows.

Markets are in jitters again at the prospect of tapering. But Governments as in India assert they are positioning themselves to cope with any contingency, though it is devoutly wished that the Federal Reserve does not rush in to spoil the game and thwart their efforts to hold on to available inflows and reserves. And a rise in long term rates, once the taper begins, would be harmful for countries struggling to find a balance externally.

US Fed Chairman Ben Bernanke’s guidance in May-June that the Fed may start to wind down its $85 billion in monthly bond purchases designed to ease the flow of credit to the economy, “later this year”, triggered a steep sell-off in stocks and bonds, and a flight to the dollar. Later, Fed deferred the start of unwinding till US economic data indicated a firm recovery taking hold and getting reflected in growth, employment and a rise in inflation toward the target of 2 per cent.

There is fresh uncertainty as to when tapering would take effect with a change-over at the head of the US Federal Reserve when Ms. Janet Yellen, President Obama’s nominee is to take over from Mr. Ben Bernanke, at the end of January. In her testimony to the Senate Banking Committee on November 13, Ms. Yellen said that despite some progress, both the economy and labour market were performing below potential and “supporting the recovery today is the surest path of returning to a more normal approach to monetary policy”.

Over the last several weeks, RBI and Government have been taking steps to cut down imports even as sharp rupee depreciation helped to strengthen exports and mobilise inflows in innovative ways to an extent that the current account deficit can not only be lowered but also conveniently financed without having to draw down the foreign exchange reserves.

After four weeks of relative stability in the rupee-dollar rate below Rs. 62, the currency had become volatile and depreciated after November 12. Dr Rajan sees no “fundamental reason” for this volatility as with import contraction, better exports and inflows through new channels (18 billion dollars till November 12-13), there is “significant progress” in curbing the size of current account deficit.

As this phase of fire-fighting on the economic front is on, there is grudging reconciliation to growth settling even at 5 per cent - which is far above what advanced economies are making, though Mr Chidambaram still hopes, with all the “green shoots” he sees around, growth could be higher at around 5.5 per cent.

The April-September industrial data show a virtual stagnation in manufacture continuing into a second year. But RBI and Government, however, bank on good monsoon effect, the visible turnaround in exports and some improvement in power generation, all of which should lead to a pick-up in economic activity for the second half of the year.

The Finance Minister does not dilate on inflation as much as his focused growth and fiscal consolidation objectives. He can now be said to have left it safely in the capable hands of Governor Dr Rajan who had begun his calibrated response to elevated inflation since September 20. Again, on October 29, he effected a second hike in the repo rate to 7.75 per cent “to break the spiral of rising price pressures”.

Now on inflation, which has not ceased throwing up unpleasant surprises - whatever the periodical prognostications of inflation falling from the Planning Commission Chief—WPI in October hit an eight-month high of 7 per cent and CPI rose to 10.09 per cent. This has triggered expectations of yet another repo hike by RBI when Dr Rajan comes up with the next mid-quarter review on Dec.18.

Dr Rajan has however sought to make it clear that no single data point or number would determine the central bank’s next move on inflation. He sees some hope of CPI “core” inflation moderating while the expected bumper harvests could generate disinflationary forces.

Even as he has acted twice to hike the repo rate, Dr Rajan has done a balancing act in lowering the short-term (MSF) rate to 8.75 per cent from 10.25 per cent - where it was on July 15 - to re-establish the earlier 100 basis point margin. By such realignment, he may have softened the impact of repo hikes and his balancing actions must be seen growth-friendly in terms of easing financial flows.

There was some lack of clarity in Dr. Rajan’s first quarter policy review on October 29 which had warnings of an inflation on the rise “in the coming months”, leading to an inference that he left the options open for further repo hikes. (In retrospect, his warning has come true with WPI rising to 7 per cent, providing comfort neither to him nor to the Finance Minister).

But in his post-policy media interactions, Dr Rajan clarified the repo hike of that date was based on the likely trajectory of WPI and CPI remaining elevated in coming months. His stock reply to questions about future hikes was to underline his faith in “disinflationary forces” gaining strength with lower growth reducing demand and some action to improve the supply side as well.

While keeping a watch on further evolution of growth-inflation dynamics, RBI would be even more keenly looking at how disinflationary forces, from a mix of factors, plays out in the coming months. Hence, Dr Rajan has said “no single data point or number will determine our next move”. Apparently he does not want a build-up of expectation of policy tightening on December 18 when he makes a mid-quarter review. By then, he should have also the November WPI and CPI data and how far the deflationary impulses have worked on the economy. (IPA Service)