Give the rupee its due, and prices will tumble

Anil Singhvi ED, Gujrat Cement The mid-term review by the Reserve Bank of India (RBI) is broadly is in line with the current developments taking place in the economy. Looking at the pace at which the global situation is changing, we may need such reviews more frequently, perhaps quarterly. The major challenge before the Indian economy today is rising inflation, as measured on WPI. But, as rightly pointed out by RBI, if we exclude four items which are iron ore, iron and steel, mineral oil and coal, the WPI is just about 4%, against an average of over 6% on the broader indices. It is noteworthy that when the government of India increased the coal prices by a whooping 17% in June '04 there was not even a murmur from anyone on such an important source of energy. We may not have much leeway in controlling inflation on account of rising international oil prices, but increasing the price of domestic coal was a major blunder by the government, which has contributed to a very large extent to such a high rate of inflation. Perhaps it is still not too late for the government to roll back the increase in coal prices to keep a control on inflationary pressures created by such a sharp increase. It is important to note that there has been a robust increase in non-food credit during the year and there has been good credit off-take by the commercial sector. With such good credit off-take during the lean period, it is expected that in the busy season from October-March there is every likelihood of enhanced credit off-take. Coupled with this is the fact that there is going to be rather unusual larger borrowing by the government during the second half, since the government borrowed only 29% of its budgeted net market borrowing during the first half. In view of this, it will be very important for 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 the economy to accelerate growth. This can only be achieved with ample liquidity in the system and a benign interest rates scenario. There is one area of concern, which has again skipped the attention of the RBI and that is the exchange rates scenario of the rupee. Since April '04, the rupee has depreciated about 5.5% against the dollar, 8% against the euro and 4.3% against the sterling pounds. We have inflationary pressures on account of oil imports and this is compounded by a depreciating rupee. I think that the RBI should focus its attention more on letting the rupee appreciate, particularly against the dollar, as most of our trade is in dollars â€” including oil. Rupee appreciation, which is in line with most currencies across the globe, would definitely help not only in checking inflation but also in keep liquidity alive. Since we are not a pre-dominantly export-oriented economy, we are in a far better situation as compared to other Asian economies. We do not need a depreciating currency to help our export sector growth for overall growth in the economy. An appreciating rupee would definitely have its salutary effect on 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, like housing loans up to Rs 15 lakh becoming eligible as part of priority sector lending, is very welcome and will help the country's emerging mortgage market in a big way. Another move of allowing issuance of CP and Fixed Deposit with a lower period of seven days is welcome. The central bank should seriously 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 by the economy.

Give the rupee its due, and prices will tumble

The mid-term review by the Reserve Bank of India (RBI) is broadly is in line with the current developments taking place in the economy.

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