Anil Singhvi

THE Mid-Term Review of the Annual Policy Statement is in line with the current developments happening in the economy. Looking at the pace at which the global situation is changing, we may have the need of such review more frequently, perhaps quarterly.

The major challenge for the Indian economy today is the rising inflation as measured by the Wholesale Price Index. But, as rightly pointed out by the RBI, if four items — iron ore, iron and steel, mineral oil and coal — are included, the WPI is just about 4 per cent against the average of over 6 per cent on the broader indices.

It is noteworthy that when the Government increased coal prices by a whooping 17 per cent in June there was not even a murmur by anyone, on such an important source of energy.

We may not have much leeway in controlling the inflation on account of oil prices but raising the price of coal was a mistake, which has contributed much to inflation. Perhaps, it is still not too late for the Government to roll-back increase in coal prices to keep a control on inflationary pressures.

It is important to note the robust increase in non-food credit during the year and there has been a good credit offtake by the commercial sector. With such good credit offtake during the lean period, it is expected that in the busy season, from October-March, there is every likelihood of even enhanced credit offtake. Coupled with this is also the fact that there is going to be a rather unusually large borrowing by the Government in the second half since in the first half, the Government borrowed only 29 per cent of its budgeted net market borrowings. In view of this, it will be very important for the RBI to continue to maintain enough liquidity in the system to provide credit to the commercial sector as well as to complete the Government's borrowing programme without putting pressure on the interest rate. It is noteworthy to keep in mind the Finance Minister's statement that he would encourage overall investment in economy to accelerate growth. This can only be achieved with ample liquidity in the system and a benign interest rate scenario.

There is one area of concern, which has once again skipped the attention of the RBI: The exchange rates scenario of rupee. Since April 2004, rupee has depreciated by about 5.5 per cent against dollar, by 8 per cent against euro and 4.3 per cent against pound-sterling.

We have inflationary pressure on account of import of oil and it is compounded by a depreciating rupee. The RBI should focus more on letting the rupee appreciate particularly against dollar as most of our trade is in dollar, and the rupee appreciation, which is in line with most currencies would help not only in checking inflation but also keeping liquidity alive.

Since India is not a pre-dominant export economy, it is in a far better situation compared to other Asian economies; the country does not need a depreciating currency to help the export sector to grow for overall growth.

An appreciating rupee would definitely have its salutary effect on the confidence in the currency and it would then result in a virtuous cycle of larger inflows, which is the need of hour for overall economic growth with the help of external funding.

The increase in repo rate by 25 bps is largely on expected lines. The other measures taken by the central bank such as housing loan up to Rs15 lakh by the banks to be eligible as part of their priority sector lending is very welcome move and this will definitely help the emerging mortgage market in the country in a big way.

Another move of allowing issuance of CP and fixed deposit with a lower period of seven days is a welcome move and the RBI should think of letting the corporate sector participate in the call market so that excess liquidity and savings of the corporate sector can be effectively used.

(The author is Executive Director, Gujarat Ambuja Cements Ltd)

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