Maintaining growth, managing inflation

MONETARY POLICY 2008-09/ VIEWPOINT

Rana Kapoor, MD & CEO, Yes Bank

Hardening inflation and moderating growth amidst global uncertainties spelt a tightrope walk for the RBI in formulating the Annual Monetary & Credit Policy for 2008-09.

The Policy required a judicious choice of monetary policy tools to achieve the twin objectives of anchoring inflation expectations while maintaining the growth momentum relatively undisturbed.

The RBI has successfully delivered once again in managing to achieve a fine balance between inflation and growth objectives.

A hike in CRR by 25 bps to 8.25% in addition to the 50 bps hike announced a fortnight ago reiterates RBI's continued focus on balancing inflation expectations through active liquidity management.

This is aimed to use liquidity management mechanism to anchor inflation expectations, while maintaining the growth momentum undisturbed by holding interest rates steady.

It is very aptly recognized that partially inflation stems from escalated food and energy prices. The RBI has recognized that while investment demand remains strong, supply elasticities have to be worked upon, suggesting that monetary measures could have limited impact in controlling price escalation at this juncture.

The decision to wait for the impact of supply related initiatives by the Government and measures relating to the cash reserve ratio to pan out is prudent.

GDP growth projection for 2008-09 in the range of 8% "� 8.5% is very encouraging. RBI has noted in the policy that inflation needs to be brought down from current high level of above 7% to around 5.5% in 2008-09.

However, containing inflation by maneuvering liquidity shows the RBI's resolve in making available adequate credit for productive sectors.

Confidence has been shown on domestic factors driving growth. This, amidst global uncertainties, hints at the resilience of the domestic economy, while RBI's reading of the international economy suggests that it expects there is now much higher probability of a global economic and credit slowdown than was anticipated till recently.