RBI Monetary policy- a balancing act

The monetary policy 2010 announced by the RBI Governor Subbarao this week clearly is a balancing act. 2008 and 2009 were difficult years for global economy. However, India has handled it's cards well even during this recessionary period. The RBI has been a watchdog which prevented Banks getting muddled up with the mortgage and derivative problems. With less dependence on exports, India could weather the storm well. RBI has made an upward revision in it's GDP guidance for India from 6% to 7.5% for the year 2009-10. In the same vein, RBI has also revised its inflation target from 6.5% to 8.5%.

The rampant inflation is what has made RBI act by increasing the cash reserve ratio (CRR)
by 75 basis points from 5% to 5.75%. By keeping all the other policy rates like Bank rate, Repo and reverse Repo rates unchanged, the RBI has sent a clear message. This act of RBI will not increase the interest rates but will suck up Rs.36,000 crores ( Rs.360 billion) from the system. Hence sustenance of growth coupled with capping inflation has become the focus for the central Bank.

India is now moving from an era of managing growth to sustaining growth. This has to be handled effectively without letting inflation go out of control. Full marks to RBI for keeping this in mind in it's policy formulation document.

Indian economy will roll forward and the central bank will have a role to play.