Business Standard

<b>Comment:</b> M D Mallya, CMD, Bank of Baroda

Policy reflects a strong commitment

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Business Standard

A successful monetary policy implies strong commitment to a nominal anchor, that is the use of policy statements and instruments to maintain low and stable inflation. The Reserve Bank of India’s (RBI’s) sustained efforts to contain inflation and anchor inflationary expectations since October 2009 has helped it bring the monetary situation close to normal.

By raising the repo rate by 25 basis points to six per cent and reverse repo rate by 50 basis points to five per cent in today’s policy, the RBI has cumulatively raised the repo rate by 125 basis points and reverse repo rate by 150 basis points so far in a steady and transparent fashion. This approach has helped not just in lowering the pressure on non-food manufacturing inflation, but also in avoiding the knee-jerk reactions in financial markets.

 

While RBI appears to be fairly optimistic on the overall growth prospects, it is duly worried about the elevated level of inflation in the months ahead. It had clearly said that while inflation rates have reached a plateau, they are likely to remain at unacceptably high levels for some months. The three concerns that are going to have a decisive influence on the “policy stance” going ahead are the continued sluggishness of the global economy and its implications for India’s exports, a volatility in India’s industrial production series and continued prevalence of negative real interest rates in the system. While the role of normalisation as a guiding principle for future policy actions is likely to be less important, RBI’s close vigilance of macroeconomic conditions, especially the price situation would have a definite influence on the future policy actions.

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First Published: Sep 17 2010 | 12:06 AM IST

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