RBI’s policy for 2010-11 needs to be viewed in the backdrop of the economic scenario in India and globally. The “green shoots” in the emerging markets co-exist today with the cautious outlook in advanced economies. In the context of rebound in the Indian economy and the risk of inflation that has come with it, the 25 bps hike in all benchmark rates is not a surprise. It is just yet another step towards normalisation of policy rates, from the earlier accommodative stance.
The statement asserts RBI’s growing conviction on the sustainability of domestic consumption led growth. The growth rate for 2010-11 is now pegged at 8 per cent with an upward bias, with the inflation outlook of 5.5 per cent for March 2011. The policy thus takes calculated positions about monsoons being normal, fiscal trend in line with budget and softer outlook on global commodities based on muted growth outlook from developed economies. Projected credit growth at 20 per cent is over and above the other market source of funds which has been expanding at a healthy rate over the last 18 months — a sign of a resilient and rapidly recovering economy.
A key aspect of the policy statement is its welcome acknowledgement of the “potentially harmful impact” that “sharp and volatile exchange rate movements” have on the Indian economy. This issue is particularly important in the context of the export performance for our economic growth and the challenge that currency volatility poses to this sector, which is still recovering from global economic shock. I am confident that RBI will take all necessary steps to keep the currency valued. Several financial sector development proposals presented in the policy are commendable. The move to allow Non-statuatory liquidity ratio bonds of infrastructure companies above 7 years in helt-to-maturity category of banks will encourage flow of much needed long term credit to the sector. Exchange traded currency options, introduction of over-the-counter credit default swaps, and extension of interest rate futures to the three months, two years and five years buckets are some of the noteworthy proposals that are likely to play a significant role in deepening Indian markets in the days to come.
To sum up, RBI has managed another delicate balancing act between the need to contain inflationary pressures and sustain growth momentum, under challenging external circumstances.
Suresh Senapaty, CFO, Wipro Ltd
