RBI survey points to 8% growth balm, continued inflation pain
FOR a government that is in firefighting mode on the inflation front, this could be something to cheer. A survey conducted by the country’s central bank based on responses from various professional economic forecasters has indicated that the economy could grow at a healthy rate of around 8.1% this fiscal. With the turmoil in the overseas credit markets, a slowdown in loan growth tempering demand in certain industrial segments, many agencies and forecasters had recently pared their estimate of India’s economic growth for 08-09. But the survey—a first of its kind by the Reserve bank of India in line with the practice adopted by many central banks—shows that the economy could expand by over 8%. This is the median of the responses of professional forecasters. The survey further shows that the expectations for savings rate growth for this fiscal is still an impressive 35% while the rate of growth of investment is expected to be 36% of GDP. Over the last four years, India’s economy has grown at an average of 8.6% with the figure for the last fiscal being 8.7%. However, worrylines remain. The macro economic survey released by the RBI on Monday has hinted that there could still be a need to tighten even if inflation cools off in the near term. This is because it believes that financial imbalances can also build up in the absence of overt inflationary pressures. “This suggests that it is important for monetary policy frameworks to allow for the possibility of a tightening even if near-term inflation remains under control—what might be called the “response option”. The unveiling of the professional forecasters survey by the RBI could well help the market be better prepared for policy measures and reducing the possibilities of surprises. However, this is only a first step as other economic indicators such as jobs data and inflation expectations, which are released every quarter by many central banks based on similar professional forecasters survey is not yet available in India. Another interesting aspect of the survey conducted by the central bank is that interest rates are expected to ease from the current level. Compared to the current yield of 8.14% on 10 year bonds, the survey results shows a median expectation of 7.8%. This could be an indicator of inflation being in a range of below 6 %. Imports are expected to grow 20% while exports are seen to grow 15.8%. In its report on Macroeconomic and Monetary Developments in 2007-08, the central bank has warned of further upward pressure on prices.