The Reserve Bank of India (RBI) Governor, in the mid-term review of the annual policy statement for the year 2004-05, has presented a balanced and realistic view of the current macro-economic environment and the market conditions. The review highlights the positives of the pick-up in investment activity, the significant growth in non-food credit and the robust external sector. It, however, cautions about the higher inflation, rising oil prices and the global imbalances.
The overall stance of the policy is growth supportive and the RBI continues to emphasise the need for supporting the investment and export demand.
However, RBI has altered its stance on liquidity by replacing the words 'adequate liquidity' with 'appropriate liquidity'.
This shift in stance is possibly emanating from RBI's concern of rising inflation and intent to maintain price stability.
Increasing the repo rate marginally by 25 basis points reveals the RBI's intentions of tackling the demand side inflation.
Further, this move is also a signal to the market that the apex bank will not shy away from further monetary tightening in case the inflation continues its present northward march.
Giving its assessment on the fiscal situation, the RBI has welcomed the fiscal responsibility legislations. However, the RBI Governor has expressed concerns on the fiscal situation.
Given the lower demand for SLR securities in face of rising credit demand and the large expected government borrowing in the busy season of the year, there are pointers for an upward movement of interest rates.
Thus, to ensure investment growth in the economy, rate increase if any, will have to be a controlled one.
