TREADING WITH CAUTION

MONETARY POLICY/ MID-TERM REVIEW2008-09

In the backdrop of the global financial turmoil, Reserve Bank of India Governor D Subbarao has chosen to make a cautious start to his innings on Mint Road.

While his predecessor Y V Reddy used to strike a balance between sustaining growth momentum and maintaining price stability, Subbarao, in his first policy announcement through the mid-term review of the annual policy statement, today brought financial stability into the picture.

The policy recognises that growth will be affected, and has lowered the projection for 2008-09 to 7.5-8 per cent, compared with 8 per cent earlier. The assessment is that the global crisis will have a bearing on the Indian economy in the form of transmission through trade and financial channels, though the Indian financial system is sound.

 

On the price front, the recent declining trend in inflation provides some comfort to RBI, but the central bank still recognises it as a big pressure point and has reiterated its intent to bring it to a tolerable level of below 5 per cent at the earliest.

But a special focus is on financial stability for which Subbarao has announced several steps, including initiating supervisory review processes to put in place appropriate adjustments in their operations. “The unabated bank credit growth relative to the sources of funds and the whittling down of excess SLR (statutory liquidity ratio) investments warrants serious policy surveillance in the context of overall financial stability and the efficiency of financial intermediation,” he said.

A big worry for RBI is the high rise in credit growth, estimated at 29.4 per cent for the year up to October 10, 2008, which is much higher than the 20 per cent projected for the year.

While RBI has injected around Rs 1,85,000 crore into the system through various measures, Subbarao has made it clear that the central bank may resort to curtailing liquidity if the recent steps are found to be causing excess liquidity, leading to inflationary pressures.

In the same vein, he has said that given the “complex and compelling policy challenges”, RBI will not shy away from using conventional and unconventional tools. An unconventional suggestion was for the government to provide subsidy to oil and fertiliser companies in cash, instead of paying through bonds, a practice used in the last few years to show lower fiscal deficit levels.