India's central bank, Reserve Bank of India (RBI), said on Tuesday that the paradigm shift in exchange rate policy announced by China was bound to have important consequences for the global economy.

Releasing its first quarterly review of the annual statement on monetary policy for the fiscal year 2005-06, the RBI, however, said that while the extent of revaluation is described as a very modest one, and the policy framework explicitly provides for management of the exchange rate, but the nature, extent and intensity of management is yet to be revealed and in any case likely to evolve gradually.

"While the direction of change is evident, the pace, the steps and the associated administrative measures by the authorities would have to be watched to determine the impact of these changes on the global economy. Of particular significance would be the ongoing responses of the domestic financial as well as real estate sectors in China to the new foreign exchange policy," the RBI statement observed.

It noted that as per current indications, the impact on India is assessed to be marginally positive on trade account, neutral on current account, and somewhat indeterminate on capital flows but is unlikely to be negative for India.

On the domestic front, the RBI quarterly review statement observed that there were several domestic factors that indicate a confidently growing economy in a stable environment despite global uncertainties.

The domestic macroeconomic factors, which are more relevant for India, continue to be positive, said the report.

"The performance of the industrial sector is strengthening and the indicators of growth in services are positive," said the report.

On roadblocks in the way of achieving higher economic growth, the report said supply constraints could emanate from inadequate infrastructure, especially in power and ports, to support higher levels of domestic and export demand.

"On balance, though uncertainties remain, the domestic growth impulses appear to have been reinforced in the first quarter," said the bank.

The RBI review report said during the current year inflation had so far remained on the expected lines.

However, the progress of monsoon rainfall and movements in international oil prices would be the major determinants of supply factors that may continue to dominate the price situation, it added.

The RBI said the stance of monetary policy would depend on macroeconomic developments, including the global developments and the overall balance of risks.

Factors such as global uncertainties, volatile global prices of oil, overhang of liquidity, high credit growth, enlargement of trade deficit, infrastructure constraints and delayed monsoon could prompt a change in the stance of policy.

Source: Xinhua