Focus on stability to support sustainable long-term growth

Written by Chanda Kochhar | Updated: Jul 29 2010, 03:06am hrs
The Reserve Bank of Indias first quarter review of monetary policy for fiscal 2011 has endorsed the strong growth fundamentals of the Indian economy. The GDP growth projection for fiscal 2011 has been raised to 8.5%, despite the continuing uncertainties in the global economy. This indicates RBIs confidence in Indias domestic fundamentals and the relative ease with which India has weathered the global economic storm.

With confidence in growth firmly in place, RBI has focused on the price stability objective. While taking cognizance of some moderation in inflation in recent months and the potential positive impact of a normal monsoon, RBI has taken steps to address the increasing generalisation of inflation across food and non-food items. The monetary measures announced are a continuation of the normalisation of policy rates that RBI has been bringing about over the past few months and these are broadly in line with market expectations.

At the same time, RBI has left the cash reserve ratio unchanged. This would ensure that the system has adequate liquidity, and is in consonance with measures adopted by RBI in the recent past to enhance systemic liquidity in anticipation of advance tax payouts and telecom auction-related outflows. This approach, along with the narrowing of the LAF corridor in this policy review, would serve to maintain stability in financial markets even as monetary policy in general is tightened to normalise policy rates and contain inflation. RBIs move to increase the frequency of public statements on policy review is also welcome and would enable the market to understand RBIs thinking on a more frequent basis.

In short, the policy stance is in alignment with a growing economy that is experiencing inflation concerns, some of which can be addressed only through structural improvements over the medium-to-long term. It will maintain financial stability that will provide a basis for sustainable growth over the long-term.

The writer is managing director & CEO, ICICI Bank