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The aggressive monetary tightening undertaken by the Reserve Bank of India, especially since December 2006, has led to inevitable comparisons with similar measures the central bank undertook in the mid-nineties.

The average GDP growth rate of 7 per cent achieved between 1993-94 and 1997-98 dropped to 5 per cent and lower eventually. New capital issues dwindled, indicating a slowdown in investments, and the benchmark stock market index, the Sensex, traded range-bound for five years from 1995 to 1999.
There is consensus this time around, too, that the GDP growth rate for 2007-08 will definitely be lower, after the recent hikes in key interest rates.  But the comparison should end there, say economists who emphasise that we are a much different economy today from what we were in the nineties and therefore the lag effect of the monetary tightening should not linger. "Even if the RBI continues with tightening measures the impact will not be as sharp as the mid 1990s," said Gaurav Kapur, associate economist, ABN Amro Bank.

When the inflation rate hit the double digits in 1994-95, the RBI unleashed measures to tame it with a vengeance. The end of that cycle of monetary tightening coincided with the famous Asian currency crisis and the central bank walked away with all the credit for having saved the Indian economy from the debacle. The Asian crisis was triggered mainly by unhedged overseas borrowings of highly leveraged industries.

"In 1995 we did not have adequate foreign exchange reserves and so the priority was to build them. Today it is different, we have substantial reserves,"
said another economist. Also, our banking system itself is robust now, with average non-performing assets of scheduled commercial banks dropping from 7 per cent in 1996-97 to 2.5 per cent in 2004-05.

"This time around the momentum is already built and the industry has committed investments to the tune of Rs 400,000 crore," said investment analyst Gul Tekchandani. At the same time, he pointed out, "We hope this is the last hike and the RBI does not tinker around too much."

Even with the 20-23 per cent credit growth the RBI is targeting, industrial credit demand should be sustainable, said Kapur, who added that funding now was not very difficult for industry. "Today, we have greater integration with global markets and also greater checks and balances against speculative borrowings," he added.

Email author: vaijayanthi.chakravarthy@hindustantimes.com