The policy statement for the year 2004-2005 by the Reserve Bank of India (RBI) broadly is in line with the current developments taking place in the economy. Looking at the pace at which global situation is changing, we may have the need of such review more frequently perhaps quarterly.
The major challenge before the Indian Economy today is the rising inflation as measured on WPI. But as rightly pointed out by RBI that if we exclude four items viz. Iron ore, Iron & Steel, Mineral Oil and Coal, the WPI is just about 4% as against average of over 6% on the broader indices.
It is noteworthy that when the Government of India increased the coal prices by whooping 17% in June 2004 there was not even a murmur by anyone, on such an important source of energy.
We may not have much leeway on controlling inflation on account of rising international oil prices but increasing the price of domestic coal was a major blunder by the Government, which has contributed to a very large extent to such a high rate of inflation.
Perhaps it is still not too late for Government to roll back increase in coal prices to keep a control on inflationary pressures created by such a sharp increase.
It is important to note that there is a robust increase in non-food credit during the year and there has been a good credit off-take by the commercial sector.
With such good credit off-take during the lean period, it is expected that in the busy season from October-March, there is every likelihood of even enhanced credit off-take.
Coupled with this is also the fact that there is going to be a rather unusual larger borrowing by the Government during the 2nd half since during the 1st half Government borrowed only 29% of its budgeted net market borrowing.
In view of this, it will be very important for RBI to continue to maintain enough liquidity in the system to provide credit to the commercial sector as well as to complete the Government's Borrowing Programme without putting pressure on the interest rate.
It is noteworthy to keep in mind Hon'ble Finance Minister's statement that he would encourage overall investment in economy to accelerate growth. This can only be achieved with ample liquidity in the system and benign interest rates scenario.
There is one area of concern, which has once again skipped the attention of RBI that is the exchange rates scenario of rupee.
Since April 2004, rupee has depreciated by about 5.5% against Dollar, by 8% against Euro and 4.3% against Sterling Pounds. We have inflationary pressure on account of import of oil and it is compounded by depreciating rupee.
I think RBI should focus its attention more on letting the Indian currency appreciate particularly against Dollar as most of our trade is in dollar including oil and rupee appreciation, which is in line with most currencies across the globe would definitely help not only in checking inflation but also keep liquidity alive.
Since we are not a pre-dominant export oriented economy, we are in a far better situation as compared to other Asian Economies, where we do not need depreciating currency to help our export sector growth for overall growth in the economy.
Appreciating rupee would definitely have its salutary effect on the confidence in the currency and it would then result in a virtuous cycle of larger inflows, which is the need of hour for overall economic growth with the help of external funding. The increase in repo rate by 25 bps is largely on expected lines.
The other measures taken by the Central Bank like housing loan up to Rs 15 lakh by the banks to be eligible as part of their priority sector lending is very welcome move and this will definitely help the emerging mortgage market in the country.
