Mumbai: Moderation in the rate of economic growth is the current policy concern but the economy should return to its high growth trajectory once global conditions return to normal, the Reserve Bank of India (RBI) said on Wednesday.
In its annual report on the banking sector for the year ending June 2008, the RBI said an industrial sector slowdown could adversely affect the profitability of the corporate sector and credit risk.
“The overall long-term macroeconomic outlook continues to be favourable with moderation of growth being the current policy concern,” the central bank said in the 508-page document.
Data last week showed industrial output fell in annual terms in October, the first such fall in more than 13 years.
Governor Duvvuri Subbarao said last week the central bank may have to lower its 7.5-8.0% growth forecast for the fiscal year ending March 2009. The economy has grown at or above 9% for the past three fiscal years.
In the report, the central bank said there were downside risks from India’s increasing global integration, such as a sustained outflow of capital, financial contagion and slowing world growth.
It said active liquidity management was key to the current policy stance and the use of a combination of instruments to absorb excessive pressures had helped cushion the impact of the global crisis on local markets.
Since October, the central bank has slashed key interest rates and banks’ cash reserve requirements, made more funds available at its market operations, and indirectly extended credit lines to mutual funds and non-banking companies.
To reduce the probability of future crisis, the central bank said it and the government should continue to adopt global best practices for prudential supervision and regulation.
“Consequently, the role of fiscal space in promoting financial stability has once again come into prominence,” the central bank said.