The Hindu Business Line : In the right direction

The economy continues to do well with GDP registering a growth of 9.3 per cent in the first quarter of this fiscal. Thoughthis is lower than the 9.6 per cent recorded in the same period last year, all the indicators are pointing towards another year of impressive growth for the economy.

The unprecedented liquidity is posing serious challenges to global economies. The central banks of countries are trying to manage the impossible trinity — interest rates, inflation and the currency. India is no exception. As the policy rightly points out, the biggest challenge is the management of capital inflows and the attendant implications for liquidity and overall stability. Of the forex reserves of $261 billion, around $62 billion was added in the current fiscal. Though the regulators had taken certain steps to moderate the inflows, lots of money is still pouring into the country.

In dollar terms, merchandise exports growth is down to 18.2 per cent in April-August this year from 27.1 per cent in the previous year. It is quite possible that the country will miss the export target of $140 billion this year.

The export sector is one of the largest employment creators in the country and continued appreciation of the currency on the back of strong inflows could hurt employment generation. Also, it could have a broader impact on the rest of the economy.

The impact of global uncertainties, particularly over crude and commodity prices, is yet to be fully reflected in the inflation numbers. The central bank will have a major challenge meeting its medium term objective of 3 per cent inflation.

The increase in the CRR by 50 basis points is a step in the right direction to moderate the liquidity in the economy. However, this could lead to hardening of interest rates and provide another window of opportunity for global funds to invest in India seeking higher returns.

The measures to enhance the tools available for corporates to cover their foreign exchange exposures are welcome.

Balancing act

Overall, the monetary policy is a fine balancing act keeping in mind the need to control excess liquidity, sustain and promote growth and manage inflation within the target level.

It is a step in the right direction amidst the backdrop of a challenging economic environment. However, more steps are needed to regulate and improve the quality of inflows, as the economy does not have the capacity to absorb such large inflows.

(The author is CFO, Infosys.)

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