Indians most optimistic on economy: McKinsey

Business executives in India are the most optimistic across the world when it comes to their take on the overall economy and inflation over the next six months, according to a survey by McKinsey.According to the Economic and Hiring Outlook survey by McKinsey for the latest quarter, 77% Indian executives said they think the economy would get ‘better’ in six months. This is the highest for the executives from any other region including China, Europe, North America and other Asia-Pacific nations.

The optimism level of 77% in India is considerably higher than the global average of 36% and the Asia-Pacific average of 46%. In China, 65% executives said they expect the country’s economy to improve in the next six months, while it was just 26% in North America. On inflation, 19% Indian executives said they expect it to decline in the next six months, which was the highest for any other region and significantly above the global average of 9% and Asia-Pacific average of 4%. In China, 13% said they expected inflation to moderate.

Just 27% of the executives in India said they expect inflation rate to increase in the next six months, which was the lowest in the world. It was the highest in China at 71%, while the global and Asia-Pacific averages stood at 39% and 52%, respectively.The survey found that around 53% Indians expect inflation to remain unchanged - higher than the global average of 51% and 43% in Asia-Pacific.

"More than half of the respondents expect inflation to remain stable over the next six months. That pattern holds even in India where three months ago, only a fifth of the respondents expected inflation to remain stable, but more than half currently do," McKinsey said.

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Mid Term policy review- Copious foreign flows

The surging capital inflows continue to pose a policy challenge for the Reserve Bank of India (RBI), as it undertakes its mid-term policy review on October 30, despite some measures taken to contain unregulated inflows. The central bank is unlikely to signal any easing of monetary policy with surplus liquidity in the system, as any lowering of interest rates at this point, could hold upside risks to inflation.The copious capital inflows have forced the RBI to mop up close to $43 billion of foreign exchange since April and $20.5 billion since September alone, to curb rupee appreciation. The rupee has appreciated by over 11 per cent against the dollar since January.

The Prime Minister's Economic Advisory Council had estimated that an increase in the forex reserves of the RBI of $26 billion in 2007-08 could be consistent with the current real growth of the economy, moderate monetary expansion ( 17.5 per cent) and a tolerable inflation rate (4 per cent). "In the current financial year up to early October 2007 itself, forex reserves have increased by over $50 billion and tackling this problem is the most crucial policy dilemma.Of the Rs 1,75,000 crore infused into the system on account of RBI's intervention in the forex market, the RBI has absorbed Rs 1,12,000 crore through issue of bonds under its market stabilisation scheme (MSS) and around Rs 31,500 crore through increase in cash reserve requirements, leaving Rs 30,000 crore of liquidity infused via interventions in the foreign exchange market still to be sterilized.

The central bank has in the last one year raised the CRR or the portion of deposits that banks are required to park with it, by 200 basis points to 7 per cent to absorb the surplus liquidity. The RBI in consultation with the government has also successively raised the MSS ceiling to Rs 2,00,000 crore.The outstanding MSS as of October 26 was around Rs 1,77,000 crore. Out of the margin of Rs 23,000 crore, the RBI will absorb Rs 11,000 crore under its MSS in the two days following the policy review.

The government, however, is not likely to hike the MSS ceiling further this year, considering the fiscal cost involved. At Rs 2,00,000 crore outstanding, the annual cost to the government is already around Rs 14,000. The RBI could by raising the CRR by 50 basis points, absorb another about Rs 15.000 crore.However, the RBI may not want to hike the CRR in the upcoming policy, instead awaiting further curbs by the government on capital inflows.


Sebi has imposed controls on use of participatory notes for investments in equities to stem surging capital flows and make them more transparent. These measures are however unlikely to have any significant impact on foreign portfolio inflows.The RBI Governor, in his speech at the Peterson Institute for International Economics in Washington earlier this month, said, "Risks from global developments continue to persist, especially in the form of inflationary pressures, re-pricing of risks by financial markets and the possibility of a downturn in some of the asset classes. Excessive leveraging has enhanced the vulnerability of the global financial system."

While, there has been a slowdown in credit growth to 23 per cent year-on-year, on October 12, from 29 per cent a year earlier, it is close to the RBI's projected growth of 24-25 per cent for 2007-08. With credit off take expected to pick up in the second half of the year, the RBI may not want to endanger the gains on inflation control front, by lowering either the repo or the reverse repo rate. The wholesale price index inflation stood at 3.3 per cent y-o-y for the week-ended September 29, though the consumer price index at 7.3 per cent, was seen hardening further. The high growth in money supply, at 21.8 per cent, is still above the RBI's target of 17-17.5 per cent. The concerns about overheating of the economy also persist against the backdrop of continued high growth in gross domestic product. According to the Central Statistical Organisation, during the first quarter of 2007-08, the real GDP grew by 9.3 per cent on the back of 9.1 per cent in the last quarter of 2006-07.

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