India?s central bank marked an unexpected pause in monetary tightening at its annual policy review on Tuesday, saying the country could be on the brink of a structural shift towards a higher rate of low-inflationary growth.
?The economy is possibly poised on the threshold of a structural step-up in the growth trajectory,? the Reserve Bank of India said. ?The containment of inflation ? has boosted growth prospects in an environment of stability and confidence.?
Maintaining that monetary conditions were consistent with price stability, the RBI forecast GDP growth of 7.5-8 per cent in the year to end of March 2007, the fourth in a row that the economy will have sustained this unprecedented pace.
Manmohan Singh, India?s prime minister, suggested on Tuesday that the pace of growth could rise still further. In a speech to business leaders, Mr Singh said: ?I feel that we cannot only sustain the current rate of economic growth of around 8 per cent but can realistically hope to target a rate of 10 per cent.?
The RBI raised its reverse repo rate three times in the year that ended on March 31 and 10 of 15 economists polled by Reuters had last week forecast that the rate would again rise by another 25 basis points to 5.75 per cent.
But lower than predicted inflation and more disciplined fiscal management by the central government may have contributed to the RBI?s pause. Wholesale inflation dipped to 3.5 per cent on April 1, down from a peak of 6 per cent in April 2005.
The RBI warned, however, that the Indian economy needed to prepare for a more complete pass-through of higher global crude oil prices. Consumers pay heavily subsidised prices at petrol stations and for cooking fuels such as kerosene.
JPMorgan, which expects the RBI to raise interest rates at its next quarterly monetary policy review on July 25, said the government was likely to raise local fuel prices in June. Few expect any move on fuel prices before elections in five states end in May.
In a bid to check the torrid pace of bank lending, the RBI favoured limited sector-specific measures rather than higher interest rates, lifting the provisioning requirement on personal bank loans and real estate lending to 1 per cent from 0.40 per cent.
The annual policy statement came against a backdrop of record business confidence, an 89 per cent rise in the Sensex index over the last year and a rapid expansion in credit growth, with loans to commercial real estate rising by 84 per cent in 2005-06.
Speaking to the Confederation of Indian Industry?s annual conference, Mr Singh claimed that improvements to India?s weak infrastructure, the main drag on the emergence of a competitive manufacturing sector, were well underway.
?By 2009, Indian infrastructure will have a new look and a new sense of dynamism,? he said, adding that he had not ?lost hope? of overcoming political opposition to reform of the country?s rigid labour laws.
Economists had expected the bank to justify a further increase in the reverse repo rates in the context of a need to cool the economy, the slowing down of capital flows and the possibility of further global monetary tightening.
The central bank cited rising property, equity and gold prices as areas of concern when it lifted the repo and reverse rates by a quarter point to 6.5 per cent and 5.5 per cent respectively in January. The bank rate remains unchanged at 6 per cent.