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In April, the Reserve Bank of India announced the contours of the monetary policy for 2002-03 and in the October 29 announcements, these remain fundamentally unchanged. Gross domestic product growth for the year is projected at 5 to 5.5 per cent, despite the drought. This is not unrealistic, since other analysts have similar estimates and also agree that the effects of the drought are over-exaggerated. The RBI also notes buoyancy in exports, upturn in industrial production, containment of money supply within the target of 14 per cent, decline in reserve money despite increase in foreign exchange reserves and support to government borrowing programmes. The point is made that foreign exchange reserves have had low effective cost and have not added to external debt since the reserves are primarily based on increased remittances, faster repatriation of export earnings and non-debt capital inflows. This is indeed true and no one will argue that Indiaís balance of payments or external debt indicators are unsustainable. Sustainability questions remain about internal debt, especially debt contracted by state governments.

Mr Bimal Jalan, the governor of the RBI, suggested in his interview that with inflation being less of a worry, softening of interest rates could be expected. The RBI feels that despite a drought and possible upward pressure on global oil prices, the trend rate of inflation should be around 4 per cent. This is plausible, unless war with Iraq pushes up oil prices to more than 35 dollars a barrel. Hence, the RBI has slashed the bank rate to 6.25 per cent, cash reserve ratio to 4.75 per cent and repo rate to 5.5 per cent. Each rate has declined by 0.25 percentage points and should lead to a reduction in bank lending rates. Given structural problems that plague Indian industry, and manufacturing in particular, there are those who will argue that these cuts are not significant and will not push up investments, since real interest rates continue to remain high. It is a moot point whether investments, which show no signs of increasing, are constrained by interest rates or whether there are structural problems. The RBI argues that there has been a substantial increase in flow of bank credit to industries. But it is also true that despite signs of industrial recovery and improved export performance, investments havenít recovered, raising questions about the nature of recovery. However, most constraints have little to do with the RBI and more to do with reforms getting stuck elsewhere. Dr Jalan has done his bit. One needs to wait for Mr Jaswant Singh.

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