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A cautious stance

In its annual credit policy statement for 2007-08, the Reserve Bank of India has not departed from its recent stance, although it has left all its key rates — the reverse repo, the repo as well as the cash reserve ratio — unchanged. Since January this year, the RBI has been emphasising price stability and moderating inflationary expectations. The other, traditional objective of ensuring adequate credit to support the growth momentum remains but containing inflation has become the paramount task. Over the past four months, the central bank has been tightening money supply and moderating the explosive growth of credit to certain sectors, through a series of hikes in the repo rates and the CRR. Besides, many of those interventions came outside the framework of the quarterly credit policy statements and it is certain that the RBI will take such initiatives as and when warranted. It has projected a GDP growth rate of 8.5 per cent for 2007-08, lower than the CSO's estimate of 9 per cent or more recorded in 2006-07. Given that the inflation containment measures of the recent past will take some time to have their impact and that the world economy is most likely to slow down this year, the RBI's growth estimate may not be off the mark. The Bank has set an inflation target of 5.00 per cent for this year, as against 5-5.5 per cent it had set for 2006-07. Broad money supply, deposits growth and credit are targeted to increase at a slower pace. Non-food credit is expected to increase by around 24 per cent to 25 per cent, significantly less than the average of 29.8 per cent recorded over the past three years.

The RBI's preference for continuity finds expression in its calibrated approach to capital account convertibility and the development of the financial sector. Interestingly, the number of measures announced to facilitate forex outflows from resident individuals and companies would be relevant not only for the medium-term convertibility agenda. They ought also to be seen in the context of a stronger external economy, with foreign exchange reserves touching $200 billion. Other than discouraging certain types of inflows, notably deposits from non-resident Indians, the RBI has not spelt out its stance on the exchange rates. Abundant dollar supplies have led to a rupee appreciation recently, with the RBI intervening less aggressively than it used to. Clearly, concerns over a stronger rupee are best addressed through the exchange rate policy, which by definition has a shorter horizon. Like the annual monetary policy statement, the quarterly reviews too are likely to remain focussed on inflation and growth in the immediate future.

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