The government?s top-level committee on financial sector reforms has said RBI must cut interest rates quickly when inflation eases up. The committee says this is necessary just ?as (RBI) raises rates when inflation is expected to exceed the objective because growth exceeds the economy’s potential.”

The committee headed by Raghuram Rajan, professor at the University of Chicago’s Graduate School of Business, has also said the poor are not helped by attempts to control appreciation of the currency. Instead the central bank should intervene in currency markets only to limit excessive volatility. “This focus can also best serve the cause of inclusion because the poorer sections are least hedged against inflation,” said the committee?s report that will be released on Monday.

The report said such a stance by RBI would prevent exporters from expecting an undervalued exchange rate and help them focus on increasing productivity, thereby contributing to growth. “It is in this way that RBI can best support the objectives of growth and stability?, it said.

The Committee on Financial Sector Reforms set up by the Planning Commission has said that reforms in the financial sector was essential to push growth by over a percentage point.

Contending that financial sector reform was a moral and economic imperative, the report said the financial sector can generate millions of well-paying jobs and have an enormous multiplier effect on inclusion and economic growth. This point was also made the earlier report of the Percy Mistry committee on making Mumbai an international financial centre.

The reform agenda includes permitting foreign investors to invest without limits in the bond markets, after putting in place a clear monetary policy framework.

It said on the retail financial side, services are still not reaching the majority of Indians, while on the wholesale side, the financial sector is not able to meet the scale or sophistication of the needs of corporate India. It also does not penetrate deeply enough to meet the needs of small and medium sized enterprises.

It noted that the promulgation of the Warehousing (Development and Regulation) Act, 2008, would lead to a reduction in the cost of financing and an increase in liquidity for the agriculture sector. “Assuming that at any time, about 15-20% of the annual agricultural produce is stored in warehouses, the Act has the potential to inject over $30 billion of agricultural credit,” the report highlighted.