Stable inflation key to rate policy: Rangarajan

A change in the Reserve Bank of India's (RBI) interest rate policy could change only after the current inflation rate was sustained for a longer period, according to C Rangarajan, the prime minister's chief economic adviser and former RBI governor.

The RBI's moves to raise interest rates and curb money supply were successful in bringing down the inflation rate from a two-year high, he said.

"Monetary policy had played a role in keeping inflation down,'' he said at a banking conclave organised by FICCI and Indian Banks' Association in the city. "We need to watch how prices move during the year.'' Inflation slowed to the lowest in 16 months in the week ended August 25.

India may maintain a growth rate near 9 per cent in 2007-08, Rangarajan said. Economic growth unexpectedly accelerated to 9.3 percent in the quarter through June from 9.1 per cent in the previous three months.

The RBI expects the economy, which expanded 9.4 per cent in the 12 months through March, to grow at 8.5 per cent in the current fiscal year.

He said in meeting the challenges of tomorrow, the financial sector and, in particular, the banking system, must respond to the changes in the real sector.

The four important facets of the changes occurring in the economy are: rapidly expanding services sector, which accounts for nearly half of the GDP, the growing external sector (constituting as much as 30 per cent of the GDP), the economy moving to a higher growth trajectory and sustaining it requires increasing investments in infrastructure, and bulk of the population still depending on agriculture and allied activities for its livelihood despite the faster rate of growth of manufacturing and service sectors.

He said in the Indian banking sector, consolidation was likely to gain prominence in the near future. Despite the liberalisation process, state-owned banks dominate the industry, accounting for three-quarter of bank assets.

Any process of consolidation among public sector banks must come out of a felt need for merger rather than as an imposition from outside and the synergic benefits must be felt by the entities themselves, he added.