The Reserve Bank of India’s monetary policy statement for 2010-11 has come as a relief to borrowers and corporate bodies alike. At least for the moment. Though the RBI has increased the repo rate (which banks pay to borrow money from the RBI) and reverse repo rate (which banks are paid to park their money with the RBI) and increased the cash reserve ratio (money that is impounded by the RBI) — all by just 0.25 per cent — it has said if the situation demands it will make further changes mid-way as it did at the end of March, five weeks before the scheduled credit policy announcement. The RBI has said its soft policy rate (what it calls the velvet policy) will continue, as it sees inflation moderating to 5.5 per cent by March 2011 and GDP growth for 2010 at eight per cent. So home, personal, consumer and other loan rates are expected to remain untouched for the moment as banks see no need to hike them right now. There is still enough liquidity in the system — an estimated Rs 32,000 crore after the last CRR hike in January — to meet both industry and government demands. That the banks are comfortable was evident when HDFC last week announced its teaser rate of 8.5 per cent for home loans. However, the government’s borrowing, particularly for unproductive non-Plan expenditure, could prove to be a spoiler. The RBI governor, Mr D. Subbarao, has given the government a word of caution about its borrowings, and the need for qualitative fiscal consolidation. Government borrowings are still very high, and if this continues it might lessen funds available to the private sector, possibly triggering higher interest rates. In his policy statement, the RBI chief clearly told the government that it needs to shift from one-off gains such as farm loan waivers and the Sixth Pay Commission award, and move towards structural improvements on both the tax and expenditure sides while moving on to the path of fiscal consolidation. On controlling inflation, the RBI’s optimism rests largely on the expectation of a good monsoon, and of industry and business doing well. The industrial production index has been showing robust growth, but the resurgence is not across the board. One hopes the RBI will also factor in the not-so-robust growth in the non-consumer durables and basic goods sector. Growth in these areas could be affected by the growing Maoist insurgency in the mineral-rich belt of Eastern India and parts of Maharashtra. Having said this, India is well onto the eight per cent growth path, which is better than what the highly developed countries have achieved. There are some imponderables that could stymie this — a bad monsoon and uncertainty in the global financial sector. While recovery in India is supported predominantly by domestic demand, trade, financial and sentiment linkages and the uncertain global environment could adversely impact the Indian economy. On the other hand, if the developed world sees a resurgence in growth it could lead to a hardening of commodity prices. Crude prices are already high. This could lead to imported inflation domestically. Another factor that could add to inflationary pressures is capital inflows. As the developed world continues its easy money policy, this money will find its way to the emerging economies which are growing the fastest. Any excessive capital flows to India can only strengthen the rupee, which has appreciated in double digits over the last one year.