Dovetailing into global trendlines

Macro Environment

Reserve Bank of India (RBI) governor Y V Reddy's view on the Indian economy seems to be deeply rooted in the developments in the world economy.

According to Reddy's first credit policy, notwithstanding favourable developments in the global markets such as historically low interest rates in several countries, rebounding equity markets and large output expansion in emerging markets such as India, China and the rest of Asia, "the world economic outlook continues to face some downside risks".

The central bank said its forex reserves had increased $6.7 billion in the first quarter of 2003-04 largely due to foreign investment inflows ($2,8 billion), higher non-resident Indian deposits ($1.7 billion) and external loans ($1.2 billion).

But it added that "while for well-known reasons it is difficult to anticipate the behaviour of capital flows, the positive sentiment on India should augur well for continued buoyancy, some moderation should not be ruled out if the stance of monetary policies in leading industrial economies were to transit from soft or neutral to a relatively tighter regime".

With that forming the background, the RBI's mid-term review of the Credit and Monetary Policy finds merit in continuing with the "broad principals of exchange rate management".

"In recent years, the annual policy statements as well as mid-term reviews have attempted to bring into sharper focus the main lessons emerging from our experience in managing the external sector during periods of external and domestic uncertainties," the statement said.

To that effect, the RBI reiterated that it will continue to monitor and mange exchange rates "without a fixed target or a pre-announced target or a band".