Current inflation rates are clearly steep and pose a risk to a recovery which is otherwise based on very strong fundamentals. Justifiably, inflation is high on the Reserve Bank’s radar. Demand from consumers and industry is strengthening fast as a robust economy gathers momentum. Demand pressures are adding to existing supply pressures. Prices of goods and services are rising across the spectrum, from consumer goods to real estate. In fact, in sectors such as real estate, price spirals are causing concerns about asset bubbles. Bubbles are clearly avoidable as they can slow – if not derail – growth.
The strong statement of intent for tackling inflation is thus very reassuring. Coming from RBI, an institution known for backing intent with sound action, the statement will reassure investors in India and around the world. India is after all a sought-after investment destination. The increments in benchmark interest rates will help manage inflationary expectations, while the reduction in the LAF corridor will reduce volatility at the short end of the curve, enhancing the effectiveness of RBI’s policy actions.
Looking beyond the concerns over inflation, the RBI’s policy statement is laced with confidence in the strength of the economic recovery which is currently underway. Signs of this recovery have been evident for most of the past year, though this time round, RBI has clearly stated that the recovery has consolidated and is becoming increasingly broad-based.
Amid renewed global uncertainties, this confidence highlights the fundamental balance sheet strength of the Indian investor and consumer, necessary for sustained long-term growth.
Before I finish, I must say the move to increase the frequency of policy updates is welcome. The move will introduce a good measure of transparency in the financial market, as flow of information on the state of the economy, RBI’s thinking and responses is enhanced. By reducing the surprise element, one also sees greater stability in financial markets and more efficient pricing of assets.
Neeraj Swaroop
CEO, India & South Asia
Standard Chartered
