Comment: M D Mallya, Bank of Baroda

Acting in the interest of sustainable high growth

RBI’s Macroeconomic Review published on January 24 clearly stated that a lower inflation regime was essential for sustainable high growth. By raising key policy rates by 25 basis points in its third quarterly review, it has understandably demonstrated the persistence of its anti-inflationary monetary stance. On Tuesday’s increase has been the seventh since March.

While RBI admitted the continued stickiness in India’s non-food manufacturing inflation was due to a strong revival of domestic demand, it has taken due care to be moderate enough to not disrupt the growth momentum.

To ensure accommodation of the growing credit demand, the additional liquidity support to commercial banks under the liquidity adjustment facility (LAF, up to one per cent of net demand and time liabilities), as well as the conduct of the second LAF window, have been extended till April 8. This has certainly improved the comfort level of banks, which are borrowing Rs 1-1.1 lakh crore daily from RBI’s repo window to cope with liquidity pressures.

At the same time, RBI has advised banks to run their operations based on a reasonable level of incremental credit-deposit ratio in the interest of financial stability.

The central monetary authority has also sensitised banks and market players about the upcoming risks in the form of translation of food inflation into generalised inflation, unsustainable level of current account deficit, slowdown in inward FDI flows and growing pressure on fiscal balances in the next financial year. This means the investment and growth plans of commercial entities need to take into account some of the risks India shares with some other emerging market economies.

M D Mallya,
Chairman & Managing Director, Bank of Baroda