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"Growth at Risk for Inflation Management: Review of Credit & Monetary Policy for Year 2008-09"

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Growth at Risk for Inflation Management
Review of Credit & Monetary Policy for the Year 2008-09

- by Dr. Gourav Vallabh *

Page - 1

As expected, after the release of Macro Economic and Monetary Development Survey Report, Reserve Bank of India (RBI) had continued to take harsh measures to check demand to control inflation in the country. In its survey report on the eve of release
of much-awaited first quarter review of annual statement on Credit and Monetary Policy for the year 2008-09, RBI had mentioned that an adjustment of overall aggregate demand is needed.

The RBI in its survey had painted a gloomy picture for the economy. A survey conducted by the central bank said that India’s gross domestic product (GDP) would grow 7.9 per cent this year against the earlier projection of 8.1 per cent. Adding to the grim forecast was the RBI’s assessment that the inflation rate would remain a concern, owing to high global oil and food prices. The government’s finances are also expected to be under strain on the back of high oil and fertilizer subsidies, farm debt waiver, and the implementation of the Sixth Pay Commission recommendations.

The Centre has budgeted for a fiscal deficit of 2.5 per cent of GDP and global rating agencies have already raised concerns over the government missing the target. The bad news doesn’t end here. The RBI’s Industrial Outlook Survey of private sector manufacturing companies pointed out that fewer respondents expected the overall situation to improve in the July-September quarter. The only good news is a better forecast for export and import growth. But even that came with a rider of a higher trade deficit. Another cause of concern is that the outstanding balance on credit cards rose 87 per cent till the end of May to Rs. 26,600 Crore, raising worries for bankers during a period of economic slowdown.

Aimed at bringing down inflation from the present around 12 per cent to 7 per cent by March 2009, the central bank increased the Cash Reserve Ratio (CRR) for the fourth time and raised short term lending rate to banks (Repo Rate) third time this fiscal. In the background of unrelenting inflationary pressure, RBI had announced stringent measures of hiking mandatory cash reserve of the banks by 25 basis points to 9% (CRR = Cash Reserve Ratio) and its short term lending rate to them (Repo Rate) by 50 basis points to 9%, to suck up an estimated Rs. 20,000 Crore from the market. RBI is still optimistic on inflation when it assures that inflation has almost peaked and is expected to move sideways from here on.

I think that inflation is still to see the peaks unless crude oil and commodity prices decline. The above way to curtail down the inflation measures can’t be a welcome move for current UPA Government, which has to face general election in 2009, as in short run these measures can’t be more effective.

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Dr. Gourav Vallabh is at present Professor (Finance) at XLRI Jamshedpur.
He is a Certified Financial Risk Manager (GARP, USA), Chartered Accountant (ICAI, India), Company Secretary (ICSI, India), Ph.D. (UoR, India), M.Com., LL.B.
Currently, he is also associated with Govt. of Rajasthan in the capacity of Honorary Advisor to Ministry of Revenue.
Article posted on August 9, 2008.


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