SEARCH

Treading a middle path

print   ·  

S. K. Mitra

The Indian economy is going through a `Goldilocks' phase, given the high growth rate, manageable inflation rate and booming stock market. At the same time, there are signs of a slowdown in the US economy and rate worries in the EU and Japan. Under the circumstances, the RBI has to do a balancing act between growth and inflation. It appears that the RBI in the Mid-term Review has taken the cautious middle path.

On the rate scenario, the RBI chose to surprise the market by increasing the repo rate by 25 basis points to 7.25 per cent, while leaving all other rates unchanged. Thus, the corridor between the repo and reverse repo rates has been increased to 125 basis points signalling a higher price for liquidity.

The current global economic standing of India is unique with its advantage of a large and growing domestic market. The country's economic and monetary policies can now be relatively independent of the US and European stance.

A recent study by CIBC World Markets points out that the US' contribution in global growth in the last three years has been only 15 per cent, whereas China's has been double that. Emerging markets, excluding China but including India, accounted for 19 per cent and oil exporters, including the OPEC, Mexico, Russia, contributed 10 per cent of global growth over the period. For the US, the contribution is a sharp drop from the 1990s when it used to be a third of the increase in global GDP.

For India, it is important to maintain the current favourable conditions for growth for a few more years. Any increase in effective interest rates will have a negative fallout for the economy. The RBI should, therefore, be commended for expressing its concerns about several economic and fiscal parameters, while leaving the interest rates largely untouched.

On the reforms front too the RBI has taken its usual "corridor" rather than a big bang "highway" approach. At a time when major and essential economic reforms are being held back on political grounds, the measured, incremental steps in reforms has to be appreciated.

The steps taken by the RBI towards improving the depth in the G-Sec market, FII investment in debt market, mutual fund and individual investments in overseas markets, etc., confirm this strategy.

One area of intrigue is that the RBI has increased the growth projection for 2006-07 to 8 per cent from 7.5- 8.0 per cent. This looks cautious and may be interpreted to mean that the RBI expects growth in the second half to be lower than that in the first, as the first-half growth has been higher than 8 per cent.

In all, in the current political and economic environment the absence of negative surprises and the incremental steps taken are welcome.

(The author is Director, Financial Services, Aditya Birla Group. The views are personal.)

(This article was published in the Business Line print edition dated November 1, 2006)
XThese are links to The Hindu Business Line suggested by Outbrain, which may or may not be relevant to the other content on this page. You can read Outbrain's privacy and cookie policy here.

O
P
E
N

close

Recent Article in OPINION

WTO must prevail over splinter groups

Trade between members of a group affects the rest of the world. Hence the importance of multilateralism »

Comments to: web.businessline@thehindu.co.in. Copyright © 2014, The Hindu Business Line.