We have come a long way since the forex crisis of 1991 and India now holds the third largest stock of foreign exchange reserves among emerging market economies after China and Russia. Infrastructure and limited capacity are becoming constraints to absorption of these resources in the domestic economy, leading to pressures for liquidity management. While RBI would use LAF to flexibly manage the inflow of funds from abroad, going forward, large increase in inflows leading to further pressure on rupee appreciation or sharp slowdown in global growth and increase in financial market turbulence could prompt RBI to soften its stance. Domestic factors have been given a larger weightage in RBIs policy, though global developments have been factored in. As pointed out by RBI, the downside risks include deceleration in manufacturing sector growth, slower growth in infrastructure sector, and fall in the Business Confidence Index driven by rupee appreciation, increase in cost of food, oil, etc, and continuing global market uncertainties. On the external front, the widening current account deficit has been partially offset by the higher invisibles surplus, though the moderation in exports of software services reflects the effects of a stronger Rupee and weaker US demand. While agriculture has shown some improvement, for sustained growth the key factors behind the poor performance of the agricultural sector in recent years, namely slowdown in technological development and fall in public investment, will have to be addressed.
The author is chairman, State Bank of India