While the central bank remains generally bullish on domestic growth, it is still worried about its old foe - inflation.
High commodity prices threaten to push up inflation, says RBI
MUMBAI: While the central bank remains generally bullish on domestic growth, it is still worried about its old foe - inflation. In the context of the volatility in the financial markets, the Reserve Bank of India (RBI) also stressed on stability in its annual report released on Thursday.
"Inflationary pressures could persist due to high global commodity prices and capital flows," the RBI said. "Supply constraints from shortfalls in agricultural performance and infrastructure could constrain future growth while also exerting inflationary pressures," it added.
It pointed out that the focus of monetary policy will be on managing structural changes to keep inflation low, while ensuring that the growth momentum is not disturbed.
"While the domestic outlook continues to look favourable, it is important to design monetary policy in such a way that it protects growth by contributing to the maintenance of stability," the RBI said in its annual report released on Thursday.
The RBI said volatility in world financial markets (owing to the US subprime crisis) may cloud global growth prospects and adversely impact emerging economies such as India. Investors have fled riskier assets, although India has not been singled out for exceptionally heavy selling. "Further deterioration in subprime delinquencies could lead to a reassessment of risk by investors across products and markets and retrenchment of capital from emerging market economies," it said.
The RBI has intervened heavily this year to stop the rupee rising too quickly due to the inflows. "Interventions have been by and large successful in reducing volatility in the foreign exchange market and have contributed to the overall financial stability," the report, for the year ended June 30, said.
Sudden movements in the currency and interest rates can harm even large companies and hence Indian banks and corporates must hedge their exposures, said the RBI warned.
Annual inflation touched a two-year high of 6.69% in January this year, but slowed down gradually to just above 4% in early August, thanks to the tightening measures by the central bank, coupled with the duty cuts by the government.
While the RBI aims to cap inflation close to 5% in the fiscal year ending March 2008, it recognises the threat from strong growth in credit, money supply and elevated asset prices.
The central bank has raised its key short-term lending rate 5 times since June 2006. The reserve requirements have been raised by 200 basis points since December. Despite doing this, money supply has been on a rising trend. While RBI's goal is to contain M3 (money supply) at 17-17.5%, it has already crossed 20%.
Monetary management in India is tough in India, the central bank observed. "Domestic interest rates are higher than the return on foreign reserves, which lead to quasi-fiscal costs. Although the fiscal deficit and public debt have declined in recent years in India, by international standards, they are still high. This restricts the flexibility available to fiscal policy to keep inflation relatively low," the report says.
While the RBI would like to make the Indian banking sector competitive with global banks, it feels the deregulation of the banking system restricts the ability to use administrative instruments such as prescribing deposit and lending rates, which some other countries may be able to use.
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}
)
){kind=small}
){kind=small}
)
)
)
)
)
){kind=small}
){kind=small}
){kind=small}
){kind=small}
){kind=small}