NEW DELHI, January 18: A battery of measures to squeeze credit unleashed by India's central bank to stem a slide in the rupee could sacrifice growth at the altar of short-term stability, say analysts.Industry officials hoped the Reserve Bank of India (RBI) would ease its grip after stability returns to the foreign exchange market, but cautioned that financial crisis in East Asia would continue to influence Indian policies.
RBI governor Bimal Jalan on Friday announced a two percentage point rise in the bench-mark bank rate, the interest charged by the central bank on other banks, and buttressed it with other credit control measures to beat back rupee speculators. "Jalan has pressed the panic button," said S.P. Gupta, director of Indian Council for Research on International Economic Relations (ICRIER).
Indian officials say the Asian crisis should not hurt India since its external account and foreign exchange reserves are comfortable, but Finance Minister P Chidambaram conceded on Friday that the rupee
had caught the Asian flu.
The rupee has lost about 12 per cent against the US dollar since mid-August, and sunk to a record low of 40.40 to the dollar on Friday before the central bank's surgical offensive pulled it back to 39.90/40 later in the day.
The RBI raised the bank rate to 11 per cent and jacked up the banks' cash reserve ratio (CRR) to 10.5 percent from 10.0 percent to sponge off some cash from the banking system. "It is an overreaction by the RBI...It will rein in inflation at the expense of growth," said V. Raghuraman, secretary-general of the Associated Chambers of Commerce and Industry.
Analysts said they could not predict the impact of the measures on the rupee and preferred to wait and watch its outcome on the forex market.
Copyright © 1998 Indian Express Newspapers (Bombay) Ltd.
