ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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RBI on Medium-Term Challenges

The Reserve Bank of India Annual Report 2010-11 reflects a strong academic input in the discussion of the short- and medium-term challenges, the foremost among them being inflation management. Policy options are listed, but they will have meaning only if the government and the central bank can together initiate action.

Indian Experience of Inflation

An assessment of the inflation record of India reveals that inflation increased from the 1970s onwards before moderating in the mid-1990s. Supply shocks, both due to a setback in agricultural production and international oil prices, and monetary expansion due to automatic monetisation of the fiscal deficit were the major contributory factors to higher inflation. Reform initiatives since the early 1990s towards developing a broad-based financial market, particularly activation of the government securities and forex markets coupled with improved monetary-fiscal interface enabled better monetary management since the second half of the 1990s. Moreover, judicious supply management through buffer stocks of foodgrains and import of sensitive commodities containing the adverse impact of supply shocks also played an important role. It can also be noted that notwithstanding the unprecedented size of external capital flows, monetary management was effective in ensuring a reduction in inflation and lowering expectations.

Uniform Import Duty

Over the last decade, there has been sustained and concerted efforts towards simplification and rationalisation of import tariff structure. The policy stance has been to put in place a tariff structure comparable to international standards particularly to that of its immediate competitors. Against this backdrop, this study has examined the uniform tariff rates in the Indian context. The study is a logical step forward to the recommendations in Kelkar Report (2002) and approaches broadly the recommendations of the Inter-Ministerial Group on Custom Tariff Structure (2001) set up by the government of India. The study recommends a uniform tariff rate at 15 per cent for all import items including defence with effect from April 1, 2004. In terms of handling the transitional problem, the study suggests the creation of Drug Fund and Defence Fund. The proceeds from the Drug Fund could be utilised for assisting primary health and from the Defence Fund for rehabilitating the defence personnel and their families.

Exchange Rate Policy and Management

The objective of this study is to present the Indian experience of exchange rate management against the backdrop of international developments both at the theoretical and empirical levels. No single exchange rate regime is most appropriate for all countries and the regime that is appropriate for a particular country may change over time. The stated objective of India�s exchange rate policy is managing volatility with no fixed rate target while allowing the underlying demand and supply conditions to determine exchange rate movements over a period. Against this background, the empirical exercise undertaken indicates that monetary policy has been successful in ensuring orderly conditions in the foreign exchange market and containing the impact of exchange rate pass-through effect on domestic inflation. Real shocks are predominantly responsible for movements in real as well as nominal exchange rate; monetary policy shocks have been relatively unimportant. Deviations from uncovered interest parity can be observed suggesting role for sterilised foreign exchange market intervention in ensuring orderly conditions; at the same time, the excess returns are insignificant and get eliminated relatively quickly. Overall, the analysis indicates that exchange rate management in India has been consistent with macroeconomic stability.
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