The Hindu Business Line : Growth-inducing

The RBI has reiterated its focus on supporting the Indian economy’s robust growth while taking steps to manage rising inflationary pressures, a key risk faced by our country today.

The central bank had to do a fine balancing act given the current time and context. And I believe it has done a commendable job, delivering a policy that will support the continued robust growth of the economy, while working towards containing inflation at reasonable levels at around 5.5 per cent. Consequently, industry and the financial markets have responded well to the policy.

The RBI has retained a robust growth forecast of 8-8.5 per cent for the 2008-09 fiscal. The economy remains fundamentally sound supported by factors such as the country’s growing competitiveness in the global market, strong domestic demand, favourable demographics, among others.

Social considerations for continued growth are also intact. Consequently, supporting continued robust growth remains a priority with the central bank. In this context, it has left rates unchanged.

Still, the rapid rise in prices of essential goods such as food, oil and raw materials is clearly a concern. Apart from supply factors, demand is also strong, including from fast growing emerging markets such as India. Inflationary pressures, if they persist, can pose a risk to our growth. Hence, the RBI has taken steps to contain inflationary pressures as well as manage expectations.

Liquidity management will play a key role in containing inflation. The RBI has announced yet another 25 basis point rise in the cash reserve ratio, which will take the rate to 8.25 per cent. And with capital inflows remaining robust, there is a possibility that the RBI will resort to further hikes. In the coming months, our expectation is that the CRR could be raised to 9 per cent.

Another key positive from the policy are the steps taken to further develop the financial markets. The RBI proposes to work with the Securities and Exchange Board of India to have products such as currency and interest rate futures traded on stock exchanges, which will improve liquidity and price discovery. Another significant move is the proposal to develop a repo market for corporate bonds. We expect the RBI will facilitate the development of this market by initiating deals, which would eventually be handled by the market itself.

(The author is Chief Executive, India & South Asia, Standard Chartered Bank.)