One major structural reform the Indian economy has witnessed over the last few years is lower inflation. For an economy where “higher than optimum level” inflation rates were a norm, current numbers tend to be closer to the Reserve Bank of India’s estimates, according to Andreas Bauer, Senior Representative – India, Nepal & Bhutan, International Monetary Fund (IMF).
The change is as important a reform as the roll-out of the Goods and Services Tax or bringing in the Insolvency and Bankruptcy Code (IBC) framework, he said. Data released by the Central Statistics Office showed that retail inflation hit a 10-month low in August at 3.69 per cent, compared to 4.17 per cent in July. The RBI’s medium-term target for consumer price index is 4 per cent within a band of +/- 2 per cent.
“The move towards flexible inflation target with a defined framework for implementation is a big step forward. And you can already see a convergence towards the target that the RBI has set. I think it is a big structural reform,” he told
Pointing out that fundamentals of the Indian economy were strong, Bauer said the current account deficit (CAD) was widening partly because of oil imports. However, the deficitis “still at a moderate level”.
India’s CAD stood at 2.4 per cent of GDP in the April-June quarter.
“In terms of magnitude, it (CAD) is much better than what it was five years ago. So I think it is time for prudent policies. In general, we do feel that the fundamentals of the Indian economy are strong. This level of current account (deficit) is more or less what we expect for a country like India,” he said.
The real effective exchange rate (REER) — the weighted average of a currency against a basket of other currencies adjusted for inflation — is broadly within the fundamentals and fluctuations are “in line”.
According to Bauer, there is scope for further reduction in banks’ statutory liquidity ratio (SLR).
A reduction in SLR would improve margins for banks and allow them access to intermediate funds at low cost, he said