RBI should balance growth, inflation

Run-Up to the Monetary Policy

In the run-up to the RBI Monetary Policy Review on April 24, a cross section of banking and financial sector experts share their view on what the policy needs to address.

What are the key points to watch out for in the RBI policy review?

We expect the RBI to be hawkish in the upcoming monetary policy review. RBI's targets for credit and deposit growth rates in the banking sector are the key points to watch out for. RBI's assessment of GDP growth and money supply in the light of appreciating rupee will decide the inflation band for FY 07-08.

RBI could specify further prudential norms for exposure by banks to the real estate and other retail loan sector in terms of provisioning requirements. While the headline inflation number could show a moderation in the short term, the recent surge in crude oil and other commodity prices and its effect on inflation is one of the areas of concern for the RBI. So in a nutshell, credit & deposit growth rates, money supply and inflation target band with RBI's assessment of GDP growth will be key points to watch out for.

Do you expect a bank rate hike?

Today the biggest concern for the RBI is to tackle the rising inflation. Recent measures by the RBI and the government to curb inflationary expectations are likely to show positive impact on the rising inflation in the days to come. Bank rate is one of the key monetary tools used by the Central bank to indicate the monetary policy stance.

The government is targeting higher economic growth with controlled inflation in the economy. The RBI has taken sufficient monetary measures to curb inflationary expectations supporting government's fiscal policy measures on the same.

In the light of these measures, a hike in the bank rate may signal tighter monetary policy stance that could hamper economic growth. So, we believe that a bank rate hike at this juncture is not advisable. If indeed the bank rate is hiked, then it would be bearish for the bond markets in the medium term.

What is your economic growth forecast?

The aggressive CRR and repo rate hikes have clouded the near-term outlook. However, India is one of the few economies in the world with high savings and investment ratio. These should help to sustain the GDP growth in the future.

The trend in the industrial production numbers suggests that economic growth is on track. Debt exposure of Indian corporates has progressively reduced over the last few years. Rise in capital goods numbers indicate a clear investment in capex which will fill the output gap in the economy and drive growth further.

Rise in per capita and investment in technology will sustain the growth in the long term. Till now, agricultural growth contribution has been limited to the overall growth of the economy. With increasing attention paid to the farm sector and irrigation, we may see rising contributions by the farm sector. We expect the economic growth to be in the range of 8%-8.5% for FY 07-08.

What are the areas of concern and how should they be addressed by the RBI?

We feel strong capital flows is the main area of concern for the RBI. The appreciating rupee and its impact on exports may affect economic growth. Rising crude and metal prices are likely to increase supply-side worries.

We expect the RBI to provide adequate liquidity to sustain the credit growth along with measures to keep inflation under control. We think the RBI has the tough role of balancing economic growth and controlling inflationary expectations. This may lead the RBI to take certain innovative and tough measures in the near future.