The Hindu Business Line : Inflation still the key concern

In a somewhat unexpected move, the RBI has increased the CRR by 50 basis points to 7.50 per cent. The reverse-repo and repo rates have, however, been kept unchanged at 6 per cent and 7.75 per cent respectively.

With no significant concerns on growth, the one significant change in the policy (that is, the decision to raise the CRR) clearly emerges from the RBI’s concern on surplus liquidity and its potential impact on inflation.

Inflation risks

Barring liquidity, other upside risks to inflation arise from elevated oil and food prices internationally as well as potential inflation in China — which could have global ramifications.

Intervention in the USD/INR spot market by the RBI has been a key source of liquidity in the market. The RBI has recognised the fact that management of capital inflows is a big challenge, and today’s CRR hike gives additional room to the RBI to intervene in the foreign exchange market to manage rupee appreciation. Recognising the fact that corporates in India need access to a wider range of hedging tools, the RBI has proposed allowing corporates to deal in American Options and to allow them to sell covered options to receive premium. These steps would offer a lot more flexibility to Indian companies to manage their currency exposures.

The RBI has also announced timelines on policy initiatives regarding introduction of interest rate futures and credit derivatives.

These measures are aimed at further developing the risk-management framework of the Indian financial markets along the lines of the global financial system.

Looking immediately ahead, it does seem that the central bank will retain its focus on inflation. With the Indian economy itself largely well-balanced, the key factors to look for in the near term appear to be related to the further unfolding of current global developments — and their impact on the Indian system by way of capital flows, commodity (and oil) prices and local asset prices.

(The author is head of Corporate, Investment Banking and Markets, HSBC, India.)

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