RBI raises GDP growth estimate from 6 to 6.5-7%

NEW DELHI: Giving a thumbs up to the Indian economy, the Reserve Bank of India (RBI) today announced its monetary and credit policy review for the fiscal year to March 2004, in which it kept the benchmark bank rate unchanged at six per cent, but raised its GDP growth estimate to 6.5 to seven per cent from six per cent. As if on cue, the Sensex touched the 5,000 point mark.


"Growth prospects are better, the inflation outlook remains benign, interest rates and foreign exchange reserves are at comfortable levels and there is adequate liquidity in the system," a Reuters report, quoting RBI governor Y V Reddy on the mid-term review of monetary policy for the fiscal year to March 2004, said.

Reddy, who started his five-year term at the helm of the central bank in September, said several developments were likely to have a positive impact on the growth rate, such as the better-than-expected monsoon, satisfactory industrial and export growth and upbeat business sentiment, the agency report said.

Traders and analysts had expected the RBI to cut its benchmark bank rate, used by banks to price loans, by at least a quarter point from a three-decade low of six per cent to boost growth in the $ 500 billion economy, Asia's third largest.

The RBI also lowered its forecast for inflation to 4.0-4.5 per cent, with a possible downward bias, from an earlier projection of 5.0-5.5 per cent, but said that prices needed to be monitored carefully.

Some of the highlights of the credit policy are:

Domestic Developments

* GDP growth in 2003-04 placed at 6.5-7.0 per cent, with an upward bias, compared to 6.0 per cent projected in April.

* Inflation projected for policy purposes at 4.0-4.5 per cent, with a possible downward bias, as compared with earlier projection of 5.0-5.5 per cent.

* Money Supply (M3) growth within the projected level as envisaged in April.

* Lower increase in reserve money despite sharp increase in forex inflows.

* Total resource flow to the commercial sector around the same level as last year.

* Government borrowing of over 60 per cent of the budgeted amount completed with longer maturities and at lower cost to government.

* Fiscal deficit as at end-September higher compared to last year.

* Reduction in interest rates in financial markets and deposits observed.

* Noticeable reduction in banks' lending rates except for

corporates and housing segment yet to take place.

External Developments

* Orderly conditions witnessed in the forex market.

* Rupee appreciated against US dollar but depreciated against Euro, Pound sterling and Japanese yen.

* Foreign Exchange reserves up by US $ 17.2 billion since end-March to US $ 92.6 billion by end-October 2003, and are at comfortable level.

* Exchange rate management, as in the past, based on flexibility, without a fixed or pre-announced target, but with ability to intervene.

* Resurgent India Bonds of US $ 5.5 billion redeemed without any adverse impact on financial market and reserves.

* In the first half, in US dollar terms, exports are up by 10 per cent and import growth is high at 21.4 per cent reflecting a pick up in economic activity, as evident from higher capital goods imports.

Overall Assessment

* Improved macroeconomic environment with positive outlook on both the domestic and external fronts.

* Gains from lower inflationary expectations in recent years need to be consolidated and reinforced.

* Improved investment climate to help in revival of investment demand.

* Financial market sentiments stronger, but there is need for monitoring and providing for unforeseen contingencies.

* Health of the financial sector continues to improve despite concerns with regard to a segment of financial institutions.

* Signs of pick-up in non-food credit since August 2003.

* Need to nurture conducive credit culture among financial

intermediaries, corporates and households.

* Credible actions required to address rigidity in lending rates and to improve quality of financial services.

* Virtual elimination of binding forex constraints imparts strength to the economic management and accords comfort to the conduct of public policy.

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