The Hindu Business Line : Growth wins over inflation

Contrary to the market expectation, but rightly so, the Reserve Bank of India has kept its key policy rates unchanged. It has laid greater emphasis on price stability and also renewed focus on credit quality and orderly financial market condition in securing macro-economic stability including financial stability. This has boosted the morale of financial markets and more so of stock markets. Bank stocks have rallied post announcement.

I have always argued for appreciation of rupee and last six months have proved it that rupee was hugely undervalued. It is heartening to note that after considerable efforts finally the RBI has reluctantly allowed rupee to appreciate. This will definitely have huge impact on lowering inflation rate. It is noteworthy that the RBI expects the growth to be at 8.5 per cent despite expected slowing down of global growth rate. At the same time the inflation target have also been revised downward to 5 per cent, which will make the nominal growth at 13.5 per cent, which is more or less at the same level of the previous year. This will be the fifth consecutive year where Indian economy will grow over 8 per cent and with this growth, we are likely to reach a GDP of $1 trillion.

The institutional framework for financial markets is undergoing significant changes in terms of participants, instruments and processes. In the context of financial deepening and development, the RBI has pursued a policy of gradual development of financial markets, in particular, the money, the government securities and the foreign exchange markets.

The RBI has also announced important operational tools for moving towards capital account convertibility. Among them Indian companies can invest in foreign companies up to 300 per cent of their net worth, hedging for individuals and remittances up to $100,000 against $50,000 earlier. Domestic producers and users will also be allowed to hedge their price risk on international commodity exchanges for copper, aluminia, zinc, and even aviation turbine fuel. Indian companies will also be allowed to rebook and cancel their forward contracts.

Barring the emergence of any adverse and unexpected developments in various sectors of the economy and keeping in view the current assessment of the economy including the outlook for inflation, the overall stance of monetary policy continues to be on:

To reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring a monetary and interest rate environment that supports export and investment demand in the economy so as to enable continuation of the growth momentum.

To re-emphasise credit quality and orderly conditions in financial markets for securing macroeconomic and, in particular, financial stability while simultaneously pursuing greater credit penetration and financial inclusion.

To respond swiftly with all possible measures as appropriate to the evolving global and domestic situation impinging on inflation expectations and the growth momentum.

(The author is Managing Director, I-Can Investment Securities.)

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