Policy to ensure growth

MONETARY POLICY: VIEW POINT

M B N Rao

M B N Rao, chairman and managing director, Canara Bank.

The Indian economy witnessed robust growth during 2006-07 for the fourth successive year with industrial production and manufacturing (April-February 2006-07) growing at 11.1% and 12.1%, respectively, and services growing by 10.7% during April-December 2006.

Against this backdrop, while adroitly managing inflation, the RBI in view of five increases effected in the past year, did well to leave key rates, viz., CRR, repo and reverse repo unchanged to ensure maintenance of the growth momentum.

As the Governor stressed "the overarching policy challenge is to manage the transition to a higher growth path while containing inflationary pressures''.

However, the RBI has clearly indicated its readiness to change rates - what it called "timely action'' - to slow the pace of price increases, should circumstances so warrant.

In view of the trade-off between checking inflation and boosting exports, the rupee has been allowed to reach a nine-year high to make imports cheaper. Given the sustained buoyancy in exports, the appreciation of the currency would not significantly impact exports.

The RBI assuages persisting concerns of increased money supply, consequent uptrend in inflationary expectations, highly skewed surge in credit, providing adequate and timely credit to the productive sectors and the need for broadening financial inclusion. But inflation remains the paramount concern. Crude oil prices and the prices of food products hold the key to future inflation control.

Several measures toward greater capital account convertibility, such as hike to 75% in limits for forward contract for exporters and importers, prepayment of ECBs upto $400 million without prior approval, higher investment overseas for Indian companies, etc. augur well for the economy.

With rebalanced credit portfolio, bank loans would grow this year at about 25% in conformity with the policy stance. Reduced risk weightage for housing loans upto Rs 20 lakh from 75 per cent to 50 per cent and reduced risk weightage on loans upto Rs 1 lakh against gold and silver ornaments would benefit the "aam aadmi".

The dynamics of monetary management in an increasingly globalised economy is an attempt to temper inflationary expectations. Financial stability has also now emerged as an increasingly important concern of monetary policy.

The policy addresses all such concerns. Checking inflation without hurting growth impulses would give a boost to the ongoing process of financial widening and financial deepening.