ECONOMY ON STRONG
GROWTH PATH WITH STABILITY – RBI
S.
Sethuraman*
The current fiscal
(2003-04) can turn out to be one of remarkable years of higher
growth with price stability and further strengthening of economic
fundamentals. The mid-term review of the Reserve Bank of India
(RBI), which has announced the monetary and credit policy for
the second half of the year (October-March), has raised the Gross
Domestic Product (GDP) growth projection to 6.5 to 7 per cent
"with an upward bias" hinting at the possibility of
the economy exceeding a 7 per cent growth. The Finance Ministry
has also assumed a growth level well above 7 per cent. Most economic
research and rating agencies have come up with upbeat forecasts.
Growth will be
achieved in conditions of lower inflation (likely in the 4 to
4.5 per cent range) for the year as a whole, with continuing "soft
and flexible" interest rates, and an abundance of lendable
resources of the banking system for the requirements of productive
sectors. Capital and current account inflows have been pushing
up the level of the country’s foreign exchange reserves year to
year. Already, in the first seven months, over 17 billion
dollars were added to the reserves which totaled 92 billion dollars
at the end of October 2003.
In growth, trade
and reserve accumulation, India’s performance has been rated high
in developing Asia, and classified as one of the fastest-growing
economies. Effects of the surge in reserves on the exchange rate
and competitiveness of Indian exports have been taken care of
by the Reserve Bank through its policy of selective intervention
to prevent any undue volatility in the rupee’s exchange rate with
the dollar, the principal world currency. The rupee has certainly
appreciated by 4.8 per cent corresponding to the dollar’s decline
between April and October (from Rs,47.50 to Rs.45.32 per dollar)
but the rupee has also depreciated in relation to other major
currencies like euro, the pound sterling and the yen.
There are bound
to be temporary variations in exchange rates in a regime when
most currencies float and some are fixed to a single or a group
of currencies on a trade-weighted basis. Developments in trade
balances of leading economies or financial market turmoils influence
the foreign exchange markets. India’s large reserve holdings are
not considered excessive in relation to the growth and size of
the economy, share of the external sector and the quantum of risk-adjusted
capital flows (short-term debt and NRI deposits). Certainly, it
provides a cushion against turbulences in the world economy.India
was able to redeem the 5.5 billion dollar Resurgent India Bonds
1998 recently without any adverse impact on the reserves or the
domestic money, foreign exchange and securities markets.
In the current
fiscal year, till mid-October, there has been a lower credit offtake
and in investments by banks in bonds/debentures/shares. But lately,
the credit growth has picked up and RBI expects a revival in investment
demand as industries have competed restructurings and harnessed
productivity gains. The domestic demand is expected to provide
a thrust especially after the kharif harvests. The Reserve Bank
has urged banks to improve their institutional and incentive mechanisms
to strengthen credit delivery and improve the quality of credit
to various segments.
The benefits
of reduced lending rates are yet to be extended to borrowers other
than corporates and the housing sector. Lending rates on demand
and term loans of public sector banks have remained unchanged
at 11.5 to 14 per cent.RBI is also setting up an advisory committee
on credit flows to agriculture and a working group on loans to
the small-scale industry. It has allowed banks to increase the
limit of loans for SSI units without collateral requirement from
Rs.15 lakh to Rs.25 lakh. Banks have also been asked to tap the
large demands for funds for infrastructure – power, ports and
roads.
In the existing
favourable price situation with abundant liquidity, RBI does not
see any need to further lower interest rates which are already
soft and banks have flexibility in fixing the lending rates. A
further cut in deposit and lending rates, though not strictly
warranted by the needs of the situation, would have caused hardship
to savers, especially senior citizens, while the borrowers would
have derived some benefit.
The new Governor
of RBI, Dr. Y. Venugopala Reddy, has thus left intact the parameters
of the Monetary and Credit Policy for the year announced in April
last. The Bank Rate will remain at 6 per cent and the Cash Reserve
Ratio of banks at 4.5 per cent, both at their lowest rates after
several years. The excellent monsoon and the expected large increase
in food production should have a favourable impact on prices.
Energy prices are also moderate even though it is difficult to
predict the course of international oil prices in the coming winter
months. Money supply growth has also been subdued. RBI has
therefore lowered the inflation rate to 4 to 4.5 per cent. At
the same time, the Governor has pointed out that RBI would keep
a vigil on prices and would take necessary steps should there
be price pressures.
The financial
markets in India have been stable and interest rates softened
further with liquidity in the system. The foreign exchange market
also witnessed orderly conditions. The capital market has seen
higher level of activity reflecting the increase in stock prices
worldwide and attractiveness of valuation of stocks in India.
The Bombay Stock Exchange’s Sensitive Index had crossed the 5000
mark at the end of October. The Resereve Bank has said it would
monitor the capital market trends so that it could step in to
take corrective measures if there is any overshooting in the upturn
of business cycle.
The Reserve Bank
has, however, cautioned against the present level of aggregate
borrowings by the Centre and States which could begin to exert
pressure on interest rates and have adverse impact on growth with
stability and also impede efficient monetary and debt management.
The Centre’s fiscal deficit was 52.7 per cent in the first half,
more than the budgeted figure for the period. RBI has emphasized
the importance of pursuing "promptly and with resolve""
fiscal consolidation with a medium-term perspective. Efforts to
widen the revenue base, rationalization of expenditures and enhancing
productivity in public investments in commercial and social sectors
have been suggested. It has welcomed the high priority accorded
by the Centre and States to eliminate revenue deficits within
five years.
The Reserve Bank
says the macro-economic environment has considerably improved
both on domestic and external fronts. Although India is well placed
in regard to growth, inflation, interest rates, liquidity in the
banking system and foreign exchange reserves, the current account
in balance of payments is turning to deficit. This is not of a
significant order, given the level of reserves, and continuing
inflows on capital account. There has been a large inflow of portfolio
capital in recent months. The current account deficit is mainly
because of trade deficit on account of larger imports which reflect
growth in demand, especially capital goods. (PIB Features)
*
Senior Freelance Writer
