Reddy presages inflation in 4-4.5% range

The rate of inflation will remain within the projected range of 4-4.5 per cent and the economy is resilient enough to take care of any adverse impact, said Reserve Bank of India (RBI) governor Y V Reddy.

He was talking to mediapersons on the sidelines of a function at the National Institute of Bank Management.

"While a hike in oil prices is a disturbing factor and is being carefully watched, it is not going to make any dramatic impact which calls for immediate action," he added.

The function was held in honour of Anne Krueger, first deputy managing director, International Monetary Fund (IMF), who presented a lecture on "A turbulent surge? International Capital flows and Indian Policy Response".

Reddy said India has the potential to have a gross domestic product (GDP) growth exceeding eight-nine per cent as demonstrable and credible action is taken for fiscal adjustment as a whole and not just by addressing the issue of fiscal deficit.

On the issue of capital flows, he pointed out that the RBI is equipped for inflows and working out ways to handle it better.

However, he added that public debt remains an area of concern and needs to be addressed.

While admitting that there is a strong consensus in India for financial reforms, the bigger issue is to analyse the nature of capital inflows under the foreign direct investment rather than just counting the number and quantity.

Towards financial deregulation, he referred to the recent opening up of the external commercial borrowing sector where the amount to be borrowed under the automatic route has been expanded 10 times from $50 million to $500 million.

In this respect, he added that though there is greater integration of the financial sector as a whole, RBI still monitors the use of funds in three different formats of household sector, financial intermediaries and corporates to analyse the reason for the need of funds.

Reacting to Krueger's suggestion of a flexible exchange rate, Reddy said while flexibility gives way to capital flows, it is important to watch where the flexibility ends and volatility starts.

This is dependent on individual country's comfort level. He also added that productive capital inflows and flexible exchange rate policy are welcome, but sound fiscal conditions will add to the comfort for better deregulation.

This is because however strong may be the economy, no risk can be avoided if the fiscal situation is not kept under balance.

Calling for a more calibrated capital account convertibility, Reddy said benefits could be reaped only if the fiscal condition is in shape.

He lauded the fact that India has benefited from globalisation but the central bank policy management, be it macroeconomy or monetary, is oriented towards two prime issues of avoiding social disruption and adverse impact of extreme volatility as a matter of consequence.