The Hindu : Opinion / Editorials : A POLICY FOR CONTINUITY

Online edition of India's National Newspaper
Thursday, May 20, 2004

Opinion

Opinion - Editorials

A POLICY FOR CONTINUITY

THE ANNUAL MONETARY and Credit Policy statement for 2004-05, the first by Reserve Bank of India Governor Y.V. Reddy (in November 2003 he presented a mid-year review of the previous year's policy), was widely expected to uphold continuity. The central bank did not disappoint. The bank, under Dr. Reddy's predecessor, Bimal Jalan, had deliberately striven to make the monetary policy statements "non-events": headline grabbing announcements such as a bank rate change or a Cash Reserve Ratio (CRR) reduction have more often than not been kept out of the policy statements and its mid-year review. There were no special reasons for the RBI to make the latest policy any different. Both the bank rate and the CRR remain unchanged at 6 per cent and 4.5 per cent respectively. Based on its observations of last year and its reading of the current year, the RBI does not anticipate any major development either within the country or outside that would warrant drastic changes in a policy whose success seemingly lies in its continuity and in preserving the status quo. Another major reason for this year's policy statement not breaking with tradition has been the unexpected change of guard at the Centre. On May 18, when the policy was unveiled, a new government was not yet in place. Like many central banks in the developed world, the RBI has enjoyed a fair amount of autonomy. But no one in India or for that matter in the West is so naïve as to suggest that monetary policy can be framed in isolation from other macroeconomic policies, in particular fiscal policy.

Monetary policy statements also tend to be watched closely for the central bank's expert views on the macro economy. Projecting a GDP growth rate of 6.5 to 7 per cent for 2004-05, the RBI says that inflation can be contained within 5 per cent. Yet there is need for a constant vigil on the price front. Avoidance of supply-side shocks and judicious management of liquidity will continue to be a challenge for the RBI and macroeconomic planners. Apart from other factors, the persistently high oil prices and an abundance of domestic liquidity can fuel inflation and upset macroeconomic stability. There has been a sustained increase in non-food credit since last September. Public sector banks have been able to reduce their lending rates quite substantially over 2003-04. The rupee appreciated against the dollar but depreciated against the euro, pound sterling and Japanese yen last year. Exchange rate management in India has been flexible. Without a fixed target, but with an ability to intervene it has been a significant success and is widely emulated by other countries. Large capital flows during 2003-04 have boosted reserves to unprecedented levels. That in turn has major implications for the conduct of monetary policy and exchange rate management. As always the RBI has stressed on fiscal consolidation.

The RBI has persisted with its by now familiar overall monetary policy stance for 2004-05. Its key objectives have been, one, to provide adequate liquidity to meet credit growth and support investment demand while keeping a close watch on the price level. Secondly, while maintaining the status quo, to work for an interest rate environment that is conducive to growth as well as macroeconomic and price stability. A few of these goals can be conflicting over the near term. In the days to come the interest policy will be closely watched for its implications for borrowers and savers. Beyond doubt the RBI will keep fine-tuning its stance so that the monetary targets remain compatible with the broader economic goals. That task will become even more relevant as a new government takes office.

Printer friendly page
Send this article to Friends by E-Mail

Opinion

News Update

Stories in this Section

A POLICY FOR CONTINUITY

FEW OPTIONS LEFT

Diplomatic tasks for the Congress

Good economics, good politics

A superb lesson in democracy