• Investment World
• eWorld
• Brand Line
• Mentor
• Life
• Brand Quest
• The New Manager
• BL Club
• Smartbuy

Stocks

• Quotes
• SE Diary
• Scoreboard
• Open-End Mutual Fund

Cross Currency

• Rates
  
  

Shipping

• Ports
  
  

Archives

• Yesterday
• Datewise
• Resources
• In Focus
• In Depth
• Events 2007

Group Sites

• The Hindu
• The Hindu ePaper
• Business Line
• Business Line ePaper
• Sportstar
• Frontline
• The Hindu eBooks
• The Hindu Images

Romesh Sobti

It has been a roller-coaster ride. Inflation which was seen as a major issue in the previous policy of July 2008 mainly on cost-push and demand-push factors is no more a bother, thanks to more than 50 per cent reversal in domestic and global commodity prices and lack of demand on recessionary trends arising from the global financial crisis.

The focus has now shifted to addressing growth and liquidity concerns.

Although the RBI reversed its earlier CRR and repo rate hikes from a peak level of 9 per cent to 6.5 per cent and 8 per cent respectively, there are no clear signs of restoration of normalcy.

The main issues that were presumably engaging the RBI ahead of the policy were restoration of credit confidence in the system due to lack of availability of funds at affordable cost and counter balancing the liquidity sapping impact of dollar sales to cushion the falling rupee.

The expectation from the market was not only to provide adequate liquidity through more cuts in the CRR and/or key reference rates but to provide sector-specific support mainly to export-oriented units, small-scale industries, small and medium enterprises, stock market investors and traders.

The adequacy of liquidity is now largely dependent on the extent of RBI’s intervention in the foreign exchange market (wherein rupee posted a new low of 50.15 in the morning trades, ahead of the policy) while there is a genuine need for reduction in reference rates to cool down the deposit and lending rates.

There is also need to get an effective solution to arrest the rupee fall (through tapping NRI resources) as recent measures of relaxation in ECB norms and token increase in NRI rates have not yielded desired results.

As a support to needy sectors to de-risk credit default crisis in the financial system, there may be a case to direct fund flows to SSI/SME units through SIDBI, agricultural-oriented units through Nabard and foreign currency funding to import/export-oriented units through EXIM Bank through special refinance schemes for banks.

To arrest the fall in the stock market, the RBI could also have been expected to revise upwards the capital market exposure of banks and review downwards the capital risk weight from the current level of 150 per cent.

While leaving CRR/SLR rates unchanged given the comfortable liquidity in the system is understandable, the main issue on dollar-rupee exchange rate, which is draining the liquidity from the system, requires to be dealt with.

The RBI’s aggressive intervention in the foreign exchange market has already removed most of the liquidity provided to the system.

If liquidity remains tight in the coming days, then the RBI might look at cutting CRR and/or SLR rates.

Call rates ruling in the 6-8 per cent corridor would have guided the RBI to keep key rates unchanged, but possible liquidity pressure in the new fortnight starting October 25 with call rates expected to trade above the repo rate, might guide a cut in key interest rates into the 5.5-7.5 per cent corridor.

So, it appears that RBI has considered adequacy of the liquidity and its cost at current level as satisfactory and would be prepared to act when warranted.

Overall, of course, we have no doubt that the RBI will act decisively when warranted and it is not necessary that these measures need to be announced on the policy day.

More Stories on : Monetary Policy | Credit Policy

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Copyright © 2008, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line