Managing policy signals complex, says RBI report

Written by Banking Bureau | Mumbai, Aug 30 | Updated: Aug 31 2007, 05:36am hrs
The major policy challenge for the monetary policy has been the combined management of a higher growth path while containing inflation. According to its annual report, the Reserve Bank of India's self-imposed medium term ceiling on inflation at 5% has had a salutary effect on inflation expectations.

The report emphasises that dealing with the trinity of fixed exchange rates, open capital accounts and discretion in monetary policy has become more complex. Detecting and measuring inflation remains a big challenge.

The operation of monetary policy in India remains constrained by uncertainties in the transmission of policy signals to the economy. Monetary policy, the report adds, will need to contend with challenges arising from other sectors.This includes fiscal imbalances that will remain large by international standards. These would have to be managed in a non-disruptive manner. Then, the enduring strength of foreign exchange inflows that would complicate the implementation of monetary policy.

In addition, the report mentions that the levels of livelihood of a large section of the population in India are inadequate to withstand sharp financial fluctuations, which impact real activity. Lastly, limitations on the elasticity of aggregate supply domestically impose an additional burden on the monetary policy, particularly in the short term. Moreover, longer term structural bottlenecks in supply can also be faced.

The report emphasises the need to manage structural change keeping inflation low and stable without dampening the growth momentum. To sum up, the report concludes that there is evidence of some cyclical elements in the current growth process.