The tone of the policy statement is balanced there is recognition that the fundamentals of the economy & prospects continue to be strong across all sectors (agriculture, manufacturing & services), that increase in gross capital formation is supportive of long term investment driven growth, that there is welcome moderation in bank credit growth, and domestic money markets have exhibited orderly behaviour, and there has been steady retreat of headline WPI inflation.
On the flip side, merchandise trade deficit has widened sizeably (despite reasonably strong export growth) triggered by volatile & record international crude prices, asset prices remain at elevated levels, CPI inflation has remained above 6% and rising, exceeding 8.5% in August and, most importantly, the expansion of global liquidity conditions in the wake of recent financial market turmoil in advanced economies raises the possibility of contagion and carries the seeds of future inflation and financial instability. It may be noted that, contrary to general perception, the fiscal situation is not improving as anticipated the revenue deficit (excluding the transfer of RBIs stake in SBI) for April August 2007 is 122.9% of the Budget estimates for the full year (2007-08), much higher than last year, because of a sharp increase in government expenditure under all categories.Understandably, therefore, the monetary policy response is cautious.
Given the multiple and complex domestic and global cues, the policy challenge for RBI is to manage the current transition to a higher growth path while containing inflation. The governor has added an additional bullet, i.e., to be in readiness to take recourse to all possible options including unconventional responses for maintaining stability and growth, to the usual three price stability/well anchored inflation, credit quality and orderly financial market conditions, and to maintain growth momentum. The core theme that emerges is the need for enhanced vigilance.
The author is MD & CEO, Bank of America, India