Rethink on rupee value necessary

ANNUAL POLICY 2005-06/ GUEST WRITERS

Anil Singhvi
Executive Director
Gujarat Ambuja

The Reserve Bank of India's (RBI) annual monetary policy statement for the year 2005 -06 is broadly on expected lines taking into consideration the development taking place in the Indian and global economy.

The task before the RBI is, like everywhere else, of maintaining growth tempo with sufficient liquidity and control on inflation. It is indeed a very challenging task.

The major challenge before RBI would be to check inflation on account of ever rising oil prices and commodity prices. We have seen in past that inflation sometimes grows unabated and RBI on many occasions was caught completely helpless to check it leaving the whole fiscal environment getting out of control.

The situation in India may also become rather difficult due to tight supply on account of high capacity utilisation across the industry. Industry capital expenditure cycle has yet not started and in short run, we may have spikes of high inflation.

On the other hand, there has been a good growth in non food credit in non industrial sectors, particularly housing and retail loans.

There are indications of enhanced credit off take in next 12 - 24 months on account of renewed capex cycle by the manufacturing sector.

There is expected to be a greater demand of credit both by corporate sector as well as by government.

The government's borrowing programme is likely to be larger than budgeted as the revenue growth expectation is far more aggressive then what is likely to be achieved.

In view of this scenario, it is very incumbent to maintain enough liquidity in the banking system.

The policy to keep the rupee under check has definitely not helped to curb inflation and RBI should rethink on its policy on value of the rupee.

To my mind with a very large forex reserve of over Rs 1,40,000 crore, which is the 5th largest in the world, now is the time for RBI to let the rupee find its true market value rather than aggressive buying and not letting it to appreciate.

The increase in the reverse repo rate by 25 basis points is a step on expected lines but it will definitely increase the cost of short term money instruments like commercial paper etc.

The other measures taken by central bank such as the relaxation in permitting sale of government securities allotted in primary issues on the same day would definitely help to deepen the money markets.

Also the proposal to allow banks to approve proposals for commodity hedging in international exchanges from their corporate customers are welcome move and is probably the first step in commencement of a commodity hedging market in the country.