The Governor of Reserve Bank of India, while announcing the annual policy statement for year 2005-06 has presented a very realistic view of the Indian economy in 2004-2005 and also the expectations in 2005-06. He has rightly identified the reasons responsible for the Inflation during the year except that he has ignored a very important factor contributing to inflation i.e. general elections. The two way movement of the value of the rupee against Dollar has resulted in increase in India’s exports in US dollars to 27.1% although it was at the same level of India’s import growth rate but increase in India’s exports in US dollars is primarily because of the excessive increase in international oil prices.

The monetary policy of 2005-2006 has over focussed on macroeconomic and price stability ensuring an appropriate liquidity to meet credit growth and support investment and expenditure demand in the economy and by pursuing an appropriate interest rate environment. The RBI Governor stance to maintain the momentum of growth instead of accelerating growth is too conservative and traditional in nature.

The monetary policy announced indicates that depending upon the circumstances there may be changes in the bank rate or CRR in the first quarter review on 26th July which have been kept unchanged now. His projections that non food bank credit including non-SLR investment to increase by about 19 % appears to be too unrealistic particularly when the non-food credit has increased by 26.5 % during 2004-05. His projections for inflation rate in 2005-2006 from a point to point basis being placed in the rate of 5 to 5.5 % may also not hold true because of the introduction of VAT in most of the states and also heavy excise and customs duty reductions granted in the budget being pocketed by the industry may have the cost push effect.

On one hand the RBI Governor has targeted the macroeconomic and price stability yet the projected expansion of money supply (M3) being placed at 14.5% as compared to 12 % for year 2004-05 seems to be contradictory.

The RBI Governor in his statement has shown a serious concern for developing a regulatory framework to encourage and monitor the banking services their nature, scope, cost to the underprivileged and common man. He has also rightly shown his concern for setting up of independent Banking Codes and Standards Board of India, widening the scope of Banking Ombudsman for individual cases and grievances and also issue guideline to banks to ensure transparency.

On the whole his policy statement for the next year based upon the fundamentals of Indian economy is realistic with positive economic outlook for the year 2005-06.

India at this stage deserve a more dynamic policy statements consistent with the policy prescription announced in the union Budget to accelerate than to maintain the growth and rejuvenate the India’s banking system to be an active player in achieving fast growth with equity and stability. The RBI Governors policy prescriptions in my opinion failed to inject the requisite dynamism, which was so imminently required at this stage.