Survey aims at early return to high growth path

Suggesting a "calibrated" approach in using monetary policy in the coming months to revive economic growth, the Economic Survey has asked the government to preserve financial stability simultaneously.     

"...Efforts to build and preserve financial stability in the economy have to be high on the agenda," said the pre-Budget Economic Survey, tabled in Parliament.     

It would require strengthening the banking sector, ensuring that the financial markets function well, and proactive liquidity management, it said.     

It also suggested institutional reforms to make regulatory oversight more effective.     

The survey said, "The focus in the coming months will continue to be having a calibrated approach to using monetary policy measures for an early return to the high growth path."     

During 2008-09, economic growth moderated to 6.7 per cent against 9 per cent in the previous fiscal.     

Noting that the risks from uncertainties in the global financial markets will continue to persist, the Survey said efforts should be made to maintain ample liquidity in the system.     

However, it would be important to ensure that once economic growth picks up momentum, excess liquidity is rolled back in the orderly manner, it said. 

The Survey said that the policy stance orientation of the Reserve Bank in the first half of 2008-09 was towards controlling monetary expansion, in view of its link with inflationary expectations.     

In the remaining six months of the fiscal, the growth of broad money was lower than that of reserve money, it said, adding that the government also took fiscal and administrative measures during the first half of 2008-09 to rein in inflation.     

As a fallout of the global financial crisis, triggered by the Lehman Brothers collapse, the RBI responded to the situation by facilitating monetary expansion through decrease in policy rates and reserves.     

The repo rate, the rate at which the RBI lends to banks, was reduced by 400 basis points in five tranches from 9 per cent August 2008 to 5 per cent on March 5, 2009.     

The reverse repo rate, the rate at which the central bank borrows from banks, was lowered by 250 basis points in three tranches from 6 per cent (in November 2008) to 3.5 per cent on March 5, 2009.     

The cash reserve ratio was slashed by 400 basis points in four tranches to 5 per cent from 9 per cent while the statutory liquidity ratio was reduced by 100 basis points to 24 per cent.