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Bimal Jalan sees steady economic growth

The head of the Reserve Bank of India on Thursday said macroeconomic conditions remained favourable for growth but an industrial slowdown was still a problem in the world's second most populous country.

"Inflation is not a concern but the industrial slowdown is," RBI Governor Bimal Jalan said after releasing the bank's annual monetary and credit policy for 2001/02 (April-March).

"But looking ahead, circumstances are looking positive both for price stability and economic growth."

The central bank said the economy could grow by 6.0-6.5 per cent this year if industrial activity picks up by next quarter, the monsoon brings adequate rain and exports do well.

The RBI's predictions were presented against a background of slowing economic growth, particularly in the industrial sector and amid scandals both in the banking sector and the local stock market.

It left its benchmark bank rate at which it lends to commercial banks at seven per cent and the commercial bank cash reserve ratio at eight per cent.

The central bank did assure the markets it would provide the liquidity required to meet commercial demand for credit while also signalling a bias for lower interest rates.

The policy document, which contained no surprises, left markets unmoved.

The central bank chief, formerly a bureaucrat, said the bank's policies aimed to take financial sector deregulation forward, citing measures that give greater flexibility to commercial banks to set lending rates.

LIQUIDITY COMFORTABLE, FED FAVOURABLE

Jalan said current liquidity conditions were comfortable for it to push through the federal government's mammoth borrowing target of Rs 1.19 trillion ($25.4 billion) in the current financial year without putting pressure on interest rates.

The RBI chief said India's external position remained comfortable and the current account deficit will be within 2 per cent of GDP in the current financial year, the same as the previous year.

"Global oil prices may not be higher than last year's average and current estimates show that (computer) software exports are not likely to be hit," Jalan said.

Computer software is an important hard currency earner, with Indian firms exporting over $6 billion worth of product last year.

Jalan dismissed suggestions that the Indian rupee needed to weaken to keep pace with other Asian currencies, which had depreciated against the dollar.

"It's silly to say that if other Asian currencies are showing a weakening bias the rupee should also show it."

Jalan reiterated that the real effective exchange rate, a trade-weighted and inflation-adjusted index, was not the sole measure to gauge the rupee's value.

"We have earlier said that do not attach any short term importance to the REER. There are a host of issues and we look at the REER over a medium term period," Jalan said.

He added that the US Federal Reserve's surprise decision to lower rates by 50 basis points would have a favourable impact on the Indian economy but did not give details.

The rupee hit a lifetime low of 47.10 per dollar on Monday, partly driven down by market estimates that it was overvalued on a trade-weighted basis.

It recovered after a central bank official said the market estimates may not have taken recent falls in inflation into account. The rupee ended Thursday at 46.85/86 per dollar.

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Monetary & Credit Policy 2001-2002 (First Half)

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