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Stability for growth

As expected, the Reserve Bank of India's mid-term review of the annual credit policy is devoid of major surprises by way of either policy measures or the monetary stance. An increase in the repo rate by 0.25 percentage points to 7.25 without a marking up of the reverse repo rate that has accompanied such increases in the recent past is the only monetary measure of significance. The spread between the repo rate, the rate at which the central bank lends against securities and the reverse repo rate — the borrowing rate — has now widened to 1.25 per cent. The implication is clear: while the RBI is still concerned about excess liquidity it does not propose to pay more for absorbing the surplus. In fact, central bank lending to banks could become more expensive in the days to come, if, as is expected, liquidity dries up and banks start borrowing through the repo window. Neither of the other benchmark rates, the bank rate and the CRR, has been changed. That again is entirely consistent with the RBI's overwhelming preference for short-term management tools, especially open market operations, to achieve the monetary goals. Such a course, pursued by all the major central banks, commends itself because of the flexibility it confers.

The RBI's views on the macroeconomy have always been keenly watched. It has increased the GDP growth projection for this year to 8 per cent from 7.5-8 per cent. Here, the RBI might be erring on the side of caution. Real GDP growth in the first quarter has been placed at 8.9 per cent. The Eleventh Plan document targets an average annual growth rate of 9 per cent over the five years starting next year. Reining in inflation within the pre-set target of 5-5.5 per cent will continue to be a priority area for monetary policy. There are some favourable factors. Global oil prices have eased considerably. The Indian financial system is showing signs of maturity even as it integrates with the global markets. Besides, there are no major negative signals from the world economy. However, money supply, non-food credit as well as bank deposits have all been growing at faster rates than projected. The RBI sees indications of growing demand pressures and potential risks from rapid credit growth, strains on credit quality, and high asset prices. Inflation expectations have been heightened by the high prices of food and other essential commodities. The RBI has continued with the process of relaxing capital account convertibility. Both individuals and corporates will benefit. Most Indian banks have now been given more time to comply with the new Basel II norms. The clear message, as it has been in the immediate past, is continuity with minimal changes.

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