The third quarter review of the annual statement by Reserve Bank of India (RBI) on the monetary policy for the year 2007-08 has reinforced the emphasis on price stability and well-anchored inflation expectations, while ensuring a monetary and interest rate environment that is conducive to the continuation of growth momentum and orderly conditions in the financial markets.
The overall stance of the monetary policy in the period ahead is expected to monitor the evolving heightened global uncertainties and the domestic situation impinging on inflation expectations, financial stability and growth momentum in order to respond swiftly with both, conventional and the unconventional measures as appropriate.
The review states that during the third quarter of 2007-08 fiscal, money, debt and foreign exchange markets remain generally stabled despite large movements in liquidity conditions. The rapid growth in the turnover of the forex market was sustained by large surplus conditions in the spot market as average daily turnover increased to $50.10 billion for the quarter ended December 31, 2007 as against $27.60 billion turnover for the corresponding quarter last year, the central bank said.
RBI indicates the underlying fundamentals of the economy as strong and resilient, and the overall outlook to be positive.
While there is no visible or immediate threat to India?s financial stability from the global developments, the need for continued but heightened vigilance has increased with an emphasis on readiness to take timely, prompt and appropriate measures to mitigate the risks to the extent possible.
According to the World Economic Outlook report released by International Monetary Fund in October 2007, the global real GDP growth on a purchasing parity basis is expected to decelerate to 4.8% in 2008 from 5.2% in 2007 and 5.4% in the year 2006. In USA, the real GDP growth is expected to slow down onwards from fourth quarter of 2007 as factors like deepening housing market correction and ongoing financial market turmoil are expected to curb growth more severely, although the exports could play a mitigating role.
Global inflationary pressures have re-emerged as a key risk to the global growth and have raised concerns in US, UK, Europe and some of the emerging market economies such as China, Malaysia, Indonesia and Chile.
RBI?s review has also stated that beginning of turbulence in international financial markets since July 2007 deepened in subsequent months when triggered by defaults in the US subprime mortgage market.
These unusual developments indicated heightened uncertainties and emerging challenges for the conduct of monetary policy, especially for emerging market economies in the world.
Several central banks confronted with volatile and large capital inflows have employed a variety of measures to manage and stabilize the capital influx to reduce overheating of the currency appreciation and the economy?s vulnerability to sharp reversal of capital flows.
