Stability-oriented monetary policy: S S Mundra

RBI is confident sufficient business would continue to flow to the banking sector in the second half of 2013-14

The policy has been on expected lines. The Reserve Bank of India (RBI) has given comfort, saying it would revert to a growth-supportive policy once the currency stabilises. Keeping both the benchmark rates and the CRR (cash reserve ratio) unchanged was the best option for RBI to support the real sector at this point.

The spillover from the US monetary policy to emerging markets has been widespread since early May, triggering central banks in emerging markets to intervene in foreign exchange markets and resort to some kind of tightening measures to dampen the outflow of capital and a sharp decline in currencies. However, most of them have avoided aggressive rate rises due to 'choppy' growth scenarios. For example, though Turkey and India have tightened their policies, they have not raised the benchmark policy rates, to keep their action as neutral as possible for the real sector.

While RBI has reduced its growth forecast for 2013-14 (from 5.7 per cent to 5.5 per cent), citing weaker domestic industrial activity and exports, it expects headline inflation to be controlled at about five per cent (year-on-year) by March 2014. Its forward-looking guidance has a dovish undertone, as it clearly says its recent tightening measures would be rolled back in a calibrated manner, as stability is restored to the foreign exchange market, enabling the monetary policy to revert to supporting growth.

Even with the reduced indicative target for growth, RBI has left unchanged its targets for the banking industry's deposit and credit growth at 14 per cent and 15 per cent, respectively. This means it is confident sufficient business would continue to flow to the banking sector in the second half of 2013-14, supported by a good monsoon and the government's ongoing efforts to ease supply constraints.

While all emerging market economies, including India, are today faced with a very different set of challenges such as volatile markets, weak currencies and faltering growth, it is important to remember the improving prospects of developed economies would support growth of emerging market economies.

Under the current circumstances, RBI has taken the best option to accord topmost priority to financial stability.

S S Mundra
Chairman & Managing Director, Bank of Baroda