09 Sep 2008 | 17:18
Monetary tightening intended to mod
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Reserve
Bank Of India has released Governor's Press Statement, contained remark
on Indianeconomy by Hon. governor of RBI Mr. Subbarao. Indian economy
has recorded 7.9% growth in firstquarter of 2008-09 compared with 9.2%
in the same quarter last year. The apex bank havepositive outlook in
Indian economy. RBI is expecting high growth and low and
stableinflation however focus will remain on to moderate demand.
Economy
The
economy clocked growth of 8.9 % on an average annual basis over the
last five years.Despite the slow-down in advanced economies, the global
financial turmoil and volatilecommodity prices, growth in the first
quarter of 2008-09, on an annualised basis, was 7.9% ? among the
highest in the world.
India's remarkable economic expansion from
an average of 5% in the 90s to close to 9% inthe recent period has been
led by rise in private consumption, rise in private investmentand surge
in exports. I believe these engines of growth are still on track. The
recentmoderation is only a cyclical downturn. The structural India
growth story is still in-tactand credible.
Monetary Policy
The
current high level of domestic inflation reflects a combination of
supply-sidepressures as well as demand-side factors. It is not
surprising that after five years of 9% growth, supply constraints will
begin to emerge. However, the present inflation islargely a global
phenomenon and is being driven by key international commodity
prices,especially of crude oil, metals and food. These external
pressures are being exacerbatedby strong domestic demand pressures.
Though demand is not the main problem, in the absenceof further
flexibility on the supply side, demand management has to be part of
thesolution. Dampening demand and anchoring inflation expectations has
been the logic behindReserve Bank's monetary stance.
For sustained
economic growth, it is essential that inflation and inflation
expectationsbe contained. Our high growth over the past five years was
accompanied by low and stableinflation, and financial stability. Our
policy stance must ensure similar outcomes in theyears ahead. Some have
argued that the monetary measures initiated by the Reserve Bankwill
affect growth. As I had said earlier, the intent behind monetary
tightening was, infact, to moderate demand, and hence, some slow-down
should not surprise us.
What, in fact, is the counterfactual?
Not tightening the monetary policy and exposingourselves to the
possibility of a runaway generalised inflation? That too would
haveeroded confidence in the economy. Indeed, the impact on growth and
the impact on the poormay have been more severe under such a situation.
I have been asked whether monetary policy will be tightened
further. There are, as theysay, several known unknowns. First, we will
have to watch the impact of the measuresalready taken. Second, we will
be watching the drivers of demand ? in particularwhich sectors are
triggering the growth in demand. Third, in a globalised world, we
willalso have to be watching developments around the world and make an
assessment of theirpotential impact on our economic management. All I
can say is that we will be monitoringthe situation closely and
continuously, be mindful of the implications of our monetarystance on
the growth prospects, and take action as appropriate.
Financial Sector
Now
let me turn to the financial sector. First of all it is heartening to
note that theReport on Currency and Finance put out by the RBI last
week finds improvement in theefficiency of the Indian banking sector,
especially of the public sector banks.
Quite evidently, the
upward shift in our growth trajectory has been possible because ofthe
higher pace of investment. Investment as a share of GDP, increased from
25 % in2002-03 to 38 % in 2007-08. Of this 13 percentage points
increase, as much as 10percentage points was financed domestically
through higher household, public sector andcorporate savings
It is
in the intermediation of these savings into investments that the Indian
financialsector played a key role in our growth story. While what the
financial sector has achievedis impressive, the task ahead is
formidable. The financial sector has to become morecompetitive,
efficient and forward looking. This underscores the importance of
financialsector reforms. The Reserve Bank is deeply conscious of this.
On
the way forward on financial sector reforms, we are not short of
analysis and advice.There are a number of reports, notably the Patil
Committee on corporate bond markets, thePercy Mistry Committee on
making Mumbai an international financial centre and theforthcoming
Raghuram Rajan Committee on financial sector reforms. The recent
Currency andFinance Report of the RBI, as also the previous Report, are
important and valuableadditions to this list. The Government and the
RBI will also be bringing out, shortly, acomprehensive report of the
Committee on Financial Sector Assessment.
What we need to do
is to use the available analyses and advice to draw a roadmap
thatresponds to our immediate and medium term needs. Obviously this is
a shared responsibilityof the government, the RBI and indeed all other
regulators. Consultation with allstakeholders will be an important
process on the way forward. We will engage in this taskin earnestness.
I
want to conclude on the subject of financial sector reforms with three
short comments.First, the liberalisation and development of the
financial sector over the last few yearshas been a key factor in
financing our 9 % growth. To sustain and accelerate this
growth,financial sector reform, aimed at improved efficiency and
financial stability, will remainimportant. In moving forward, we will
draw from the lessons of global experience of therecent period, and be
cognizant of the evolving global situation. Second, financial
sectorreforms are not an end in themselves. They have meaning and
relevance only if they areanchored in real sector objectives. Third,
financial sector reforms should promoteinclusive growth through
efficient and easily accessible financial services.
Monetary tightening intended to mod
Visit site at - http://investorline.co.in/
Newsroom -
http://newsroom.investorline.co.in/
Learning
Center- http://learning.investorline.co.in/
Mutual
funds - http://mutualfunds.investorline.co.in/
Life Insurance - http://insurance.investorline.co.in/
Investor
Journal - http://research.investorline.co.in/
Investor
Forums- http://forums.investorline.co.in/erate demand says RBI governor
Reserve
Bank Of India has released Governor's Press Statement, contained remark
on Indianeconomy by Hon. governor of RBI Mr. Subbarao. Indian economy
has recorded 7.9% growth in firstquarter of 2008-09 compared with 9.2%
in the same quarter last year. The apex bank havepositive outlook in
Indian economy. RBI is expecting high growth and low and
stableinflation however focus will remain on to moderate demand.
Economy
The
economy clocked growth of 8.9 % on an average annual basis over the
last five years.Despite the slow-down in advanced economies, the global
financial turmoil and volatilecommodity prices, growth in the first
quarter of 2008-09, on an annualised basis, was 7.9% ? among the
highest in the world.
India's remarkable economic expansion from
an average of 5% in the 90s to close to 9% inthe recent period has been
led by rise in private consumption, rise in private investmentand surge
in exports. I believe these engines of growth are still on track. The
recentmoderation is only a cyclical downturn. The structural India
growth story is still in-tactand credible.
Monetary Policy
The
current high level of domestic inflation reflects a combination of
supply-sidepressures as well as demand-side factors. It is not
surprising that after five years of 9% growth, supply constraints will
begin to emerge. However, the present inflation islargely a global
phenomenon and is being driven by key international commodity
prices,especially of crude oil, metals and food. These external
pressures are being exacerbatedby strong domestic demand pressures.
Though demand is not the main problem, in the absenceof further
flexibility on the supply side, demand management has to be part of
thesolution. Dampening demand and anchoring inflation expectations has
been the logic behindReserve Bank's monetary stance.
For sustained
economic growth, it is essential that inflation and inflation
expectationsbe contained. Our high growth over the past five years was
accompanied by low and stableinflation, and financial stability. Our
policy stance must ensure similar outcomes in theyears ahead. Some have
argued that the monetary measures initiated by the Reserve Bankwill
affect growth. As I had said earlier, the intent behind monetary
tightening was, infact, to moderate demand, and hence, some slow-down
should not surprise us.
What, in fact, is the counterfactual?
Not tightening the monetary policy and exposingourselves to the
possibility of a runaway generalised inflation? That too would
haveeroded confidence in the economy. Indeed, the impact on growth and
the impact on the poormay have been more severe under such a situation.
I have been asked whether monetary policy will be tightened
further. There are, as theysay, several known unknowns. First, we will
have to watch the impact of the measuresalready taken. Second, we will
be watching the drivers of demand ? in particularwhich sectors are
triggering the growth in demand. Third, in a globalised world, we
willalso have to be watching developments around the world and make an
assessment of theirpotential impact on our economic management. All I
can say is that we will be monitoringthe situation closely and
continuously, be mindful of the implications of our monetarystance on
the growth prospects, and take action as appropriate.
Financial Sector
Now
let me turn to the financial sector. First of all it is heartening to
note that theReport on Currency and Finance put out by the RBI last
week finds improvement in theefficiency of the Indian banking sector,
especially of the public sector banks.
Quite evidently, the
upward shift in our growth trajectory has been possible because ofthe
higher pace of investment. Investment as a share of GDP, increased from
25 % in2002-03 to 38 % in 2007-08. Of this 13 percentage points
increase, as much as 10percentage points was financed domestically
through higher household, public sector andcorporate savings
It is
in the intermediation of these savings into investments that the Indian
financialsector played a key role in our growth story. While what the
financial sector has achievedis impressive, the task ahead is
formidable. The financial sector has to become morecompetitive,
efficient and forward looking. This underscores the importance of
financialsector reforms. The Reserve Bank is deeply conscious of this.
On
the way forward on financial sector reforms, we are not short of
analysis and advice.There are a number of reports, notably the Patil
Committee on corporate bond markets, thePercy Mistry Committee on
making Mumbai an international financial centre and theforthcoming
Raghuram Rajan Committee on financial sector reforms. The recent
Currency andFinance Report of the RBI, as also the previous Report, are
important and valuableadditions to this list. The Government and the
RBI will also be bringing out, shortly, acomprehensive report of the
Committee on Financial Sector Assessment.
What we need to do
is to use the available analyses and advice to draw a roadmap
thatresponds to our immediate and medium term needs. Obviously this is
a shared responsibilityof the government, the RBI and indeed all other
regulators. Consultation with allstakeholders will be an important
process on the way forward. We will engage in this taskin earnestness.
I
want to conclude on the subject of financial sector reforms with three
short comments.First, the liberalisation and development of the
financial sector over the last few yearshas been a key factor in
financing our 9 % growth. To sustain and accelerate this
growth,financial sector reform, aimed at improved efficiency and
financial stability, will remainimportant. In moving forward, we will
draw from the lessons of global experience of therecent period, and be
cognizant of the evolving global situation. Second, financial
sectorreforms are not an end in themselves. They have meaning and
relevance only if they areanchored in real sector objectives. Third,
financial sector reforms should promoteinclusive growth through
efficient and easily accessible financial services.
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