RBI loath to spoil feel-good party, but tense over prices

RBI loath to spoil feel-good party, but tense over prices
The Economic Times, October 27, 2009, Page 9

ET Bureau, MUMBAI

The Reserve Bank of India has acknowledged the resurgence of the feel good factor in the Indian economy but has said that growth and
inflation continue to be a concern.

Maintaining a hawkish stance on inflation, the central bank has highlighted its concern over slowdown in credit offtake and surplus liquidity in the system, giving no clear indication on its rate stance. In its report on Macro and Monetary Developments in Q2 of 2009-10, the Reserve Bank has noted that `The combination of a weak recovery and elevated CPI (consumer price index) inflation has already magnified the complexity of policy challenges, notwithstanding the subdued nature of headline WPI inflation so far.’

`While premature reversal of the monetary policy stance entails the risk of stifling recovery, persistence of accommodative stance could adversely impact inflation expectations.’

However, the results of its survey based on “assessment for July- September 2009” and “expectations for October-December 2009” point to a strong momentum in industrial recovery. Both the indices remained above 100 for the second consecutive quarter (100 is the threshold that separates contraction from expansion). According to the central bank’s analysis, this suggests that the industrial recovery already seen up to August 2009 in terms of trends in IIP growth could gain further momentum.

According to the survey findings, the outlook for employment is also improving and firms are expected to increase their workforce on the back of expected increase in demand.

Among the positive pointers to the economic recovery include improved financial conditions as reflected in return of capital flows, significant recovery in the stock markets, and better transmission from low policy rates to declining lending rates. The RBI has also said that there should not be any concerns about private credit getting crowded out since over 80.4% of the government borrowing programme has been completed so far as there is adequate liquidity in the system.

But it is concerned about the deceleration in private consumption and investment demand that it says needs to be reversed from the low levels seen in the first quarter of 2009-10 for ensuring a sustainable recovery.