Sumant Sinha: Continuity reassuring

RBI ANNUAL POLICY 2004-05/ GUEST COLUMNS

Sumant Sinha
President "" Corporate Finance
Aditya Birla Group

Amidst all the volatility in the markets over the last two days, the annual policy statement of the Reserve Bank of India was a reassuring feature of continuity.

The statement came against the backdrop of rising commodity prices, quickening growth rates and uncertainty about the pace of the reform process. Given all the circumstances, the statement was prudent and largely to expectations.

The good news is that the GDP growth forecast for the current financial year is still a healthy 6.5 to 7 per cent, with faster industrial activity. This is substantiated by the sustained pick up in non-food credit since September and the fact that the total flow of resources to the commercial sector was higher than last year.

The other positive factor has been that the government borrowing programme was at a much lower cost than initially anticipated, and this has gone towards reducing the fiscal deficit.

The RBI states that the price situation is unlikely to cause concern to macro stability during 2004-05. They have also emphasised the need to provide credit to small and medium enterprises as well as to rural and agricultural areas.

The bank rate and the repo rate have been kept stable at 6 per cent and 4.5 per cent, respectively. Given the current situation of the market "" needing liquidity "" and the uncertainty of a new government coming in, there really was little choice. The RBI has expressed mild apprehension about prices going up in the near future and, therefore, there is also a likelihood that rates will go up at some point.

The statement further goes on to say that GDP growth in 2003-04 was a result of both cyclical as well as structural factors. It notes among structural factors that manufacturing industry is also showing signs of global presence, and that in terms of growth for the coming year India will continue to be among the top performers globally.

This must be encouraging for portfolio and FDI investors. The only cloud on the horizon is likely to be a mild up tick in inflation according to the RBI, and a hardening of interest rates in India, both in response to mildly higher inflation and increase in interest rates globally.