Opinion - Editorials   

Concern over liquidity

The first quarter review of the monetary policy does not depart from the RBI’s well known recent stance of maintaining price stability at all costs. The outlook for inflation remains unchanged, and holding headline inflation within 5 per cent during 2007-08 remains a top priority. In hiking the CRR by 0.50 percentage point to 7 per cent while leaving the policy rates — the repo, the reverse repo, and the bank rates — untouched, the RBI is clearly concerne d with the abundance of liquidity in the banking system that recently brought down the overnight Interbank lending rates to very low levels. In its view a blunt measure to drain liquidity rather than tinkering with the short-term repo rates was in order. To compensate banks partly for the loss caused by the impounding of resources, the Rs.3000 crore daily ceiling on reverse repo rate is being removed. But the expectation that the call and other short-term rates will stabilise around the repo rate, currently at 6 per cent, might be belied. On a year-on basis up to mid-July, key monetary indices, the broad money supply and aggregate deposits with banks, have been running ahead of their targets. However, as expected, there has been a slowdown in the growth of non-food credit. Over the previous three years, it grew annually at a phenomenal 30 per cent. As part of an anti-inflation policy the central bank imposed restrictions and raised the cost of lending to the retail sector and home loans. Yet, traditional borrowers have had greater access to the capital market and to the relatively new sources such as external commercial borrowings.

Apart from ensuring price stability and meeting the genuine requirements of the real economy, the RBI has another related objective — the maintenance of financial stability. Foreign institutional investors have brought in a record $8.45 billion up to mid-July, as against $7.99 billion for the whole of 2006. The abundance of dollars should normally cause the rupee to appreciate even more, but there are indications that the RBI would intervene to defend the rupee’s current trading range of Rs.40.30 to Rs.41. That could constrain the liquidity containment policies. Certain recent global developments tellingly demonstrate the interdependence of financial markets. Last week, credit worries in the U.S. home loan market caused a sharp downturn in the stock markets everywhere. The other major worry for monetary management has been the surge in global oil prices and the reappraising of risks in the emerging markets. The RBI is probably not being too conservative in sticking to its GDP projection at 8.5 per cent for 2007-08, by citing resurgence in inflation as a possible major threat.

Printer friendly page  
Send this article to Friends by E-Mail

Stories in this Section

Concern over liquidity
Awash with waste
Should we allow U.P. to hijack Indian politics?
The long term damage to Kerala’s health
Long road to employment guarantee
Pollution threatens Himalayan glaciers
Britain has lost art of socialising the young
Corrections and clarifications
Jail for Sanjay
Unwanted media hype
Congratulations!

Copyright © 2007, The Hindu. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu