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Reserve Bank belies expectations

MUMBAI: Rejecting a gloomy scenario, Reserve Bank of India (RBI) Governor Y. V. Reddy said on Tuesday that “it’s a bright picture for Indian economy,” and decided not to change the short-term and long-term rates, in a bid to maintain financial and price stability, belying all predictions of a softer interest rate regime.

However, some moderation is witnessed in the growth rate relative to last year, said Dr. Reddy, adding that, “this element of moderating is part of economic cycle.

“We are still the second fastest growing economy in the world, even though industrial activity appears to be experiencing some transient and cyclical effects affecting manufacturing performance.”

Reviewing the third quarter of financial year for its monetary policy purpose, here, Dr. Reddy said that “when we reviewed developments in India they were on expected lines.”

He retained the overall Gross Domestic Product (GDP) growth at 8.5 per cent for 2007-08. On global scenario Dr. Reddy said, recent global events were not entirely anticipated, but the intensity appears to be severe and the duration uncertain.

In terms of the impact on India, he said, “our external trade is, relative to many other emerging market economies, well diversified. Similarly, on a systemic basis, most parts of the balance sheets of public and private sectors are relatively less exposed to foreign currencies.”

He also said the policy endeavour would be to contain inflation close to five per cent in 2007-08.

However Dr. Reddy said, “in recognition of India’s evolving integration with the global economy and societal preferences in this regard, the resolve, going forward, would be to condition expectations in the range of 4 to 4.5 per cent so that an inflation rate of around three per cent becomes a medium-term objective.”

Dr. Reddy said that the present inflation rate was apparently comfortable. But there was an element of suppression of the inflation rate as pass-through of global oil prices (to domestic prices) not occurred. Escalated and volatile international crude oil prices and heightened level of food prices pose clear and present risks to the inflation outlook at the current juncture.

“Overhang of liquidity (funds available in the system) is prevailing. We reinforce higher priority for price stability,” said Dr. Reddy. Further he said that investment demand was high. “However we are keeping a vigil on liquidity.” According to him, some institutional and procedural impediments are obstructing the expansion and delivery of credit.

The central bank emphasised, for the period ahead, the need for “credit quality as well as credit delivery, in particular, for employment-intensive sectors, while pursuing financial inclusion.”

Our New Delhi Correspondent writes:

The Finance Minister P. Chidambaram on Tuesday endorsed the cautious and standstill approach adopted by the Reserve Bank of India in its third quarter review of monetary policy.

Even as the corporates, especially the realty and auto sectors, had expected a marginal cut in interest rates to revive demand, the RBI chose to maintain a status quo in interest and other key rates in a bid to stem even the chances of an inflationary spiral, in view of the current complex global situation and domestic factors.

Speaking to newspersons here, Mr Chidambaram noted that he fully endorsed the Central bank’s stance in a scenario where global oil and commodity prices were ruling at a high level and any tinkering with interest rates with an eye on boosting demand by making available cheaper funds could fuel inflationary expectations.

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