By IANS
Mumbai : Focusing mainly on keeping headline inflation close to five percent, the Reserve Bank of India (RBI) Tuesday left key rates unchanged and projected a growth of 8.5 percent for the economy during the current fiscal.
“The policy endeavour would be to contain inflation close to five percent in 2007-08 while conditioning expectations in the range of 4-4.5 percent,” the Reserve Bank of India said in its quarterly review of the bank’s current monetary policy.
“Indications are getting stronger of upside inflationary risks in the period ahead. Overall, inflationary pressures have firmed up with implications for the outlook for 2008,” RBI Governor V. Venugopal Reddy said.
The benchmark bank rate, the reverse repo rate, the repo rate and cash reserve ratio (CRR) have all been left untouched, the RBI said, and added that management of liquidity will assume priority in the conduct of monetary policy.
“Over the period ahead, liquidity management will continue to assume priority in the conduct of monetary policy,” the governor said.
Repo rate denotes the discount at which the central bank repurchases government securities from commercial banks to inject liquidity in the system and reverse repo rate signifies the rate at which it absorbs liquidity from banks.
While the bank rate is currently pegged at 6 percent, the reverse repo rate and the repo rate have been notified at 6 percent and 7.75 percent respectively. The cash reserve ratio stands at 7.5 percent.
The conservative approach adopted by the Reserve Bank, given the uncertainties in the global economy, evoked some positive reactions from Finance Minister P. Chidambaram, who described the policy review as a “standstill” approach.
“The policy should be interpreted as one where the Reserve Bank of India has reserved the flexibility to move either ways depending on the situation,” the finance minister told reporters here.
“It is a standstill approach and I fully endorse that approach,” he said.
“This, I feel, is the correct approach to take today given the uncertainties in the international economy,” the minister added, in an obvious reference to the fears of a recession in the US economy and the financial crisis there.
But the Indian industry was not pleased, especially since the crucial bank rate that serves as the benchmark for subsequent lending by commercial banks was left unchanged.
“It seems that inflation has become the sole concern of the central bank,” said V.N. Dhoot, president of the Associated Chambers of Commerce and Industry of India (Assocham), reacting to the central bank’s monetary policy review.
“We fear that the continued policy indifference towards issues of real economy may compel the industry to postpone their investment plans in expectation of a demand slowdown,” Dhoot added.
In a similar vein, the Federation of Indian Chambers of Commerce and Industry (Ficci) said the interest rates could have been fine-tuned, since the revival of industrial and services growth was crucial to the overall economy’s performance.
“Along with rising rupee, high interest rates have taken a big toll on several sectors of the economy, particularly the small and medium enterprises,” said Ficci president Habil Khorakiwala.
RBI Governor Reddy said the thrust of Tuesday’s review was to reinforce the emphasis on price stability and well-anchored inflation expectations while ensuring that the environment of interest rates are conducive to maintaining the growth momentum.
On economic growth, however, the governor had a cautionary note. “The business confidence surveys conducted by other agencies convey a mixed, though overall positive, picture for the near future,” he said.
“The moderation in growth expectations is reflected in anticipation of some deceleration in production and order books growth,” he added.
“The immediate task for public policy in India is to manage possible financial contagion that seems to have highly uncertain prospects of being resolved soon,” Reddy said.
“Accordingly, monetary policy has to be vigilant and proactive in cushioning the real economy from excess volatility in financial markets while recognising that India cannot be totally immune to global developments.”
Referring to the developments in the international financial markets, the RBI governor said these presented issues that needed to be monitored carefully in the context of the implications for emerging market economies like India.
“The setting of monetary policy in India has been rendered complex,” he said.
While economic fundamentals for the country remained strong, the need also arose for heightened vigilance with an emphasis on the readiness to take timely and prompt action to mitigate the risks to the extent possible.