Capital flow for infrastructure should have been eased

Written by Prabal Banerji | Updated: Oct 31 2007, 07:05am hrs
Although apparently the credit policy appears a tad non-event, if we look at it in detail, we find that the RBI has done an excellent balancing act of the issues facing the country today in the form of inter alia -- inflation, capital inflows, liquidity overhang, currency appreciation and crude price pressure coupled with demand for sustainable GDP growth.

Looking at the monetary instruments, RBI has only increased CRR by 50 bps for sterilising extra liquidity in the system. This step was mainly undertaken towards controlling the M3 and inflationary impact so that GDP growth can be maintained despite crude approaching $100 a barrel. In view of the fact that M3 (money supply) went up by 32% vs a target of about 17%, RBI was right in its steps. In view of the fact that globally there have been indications of credit squeeze, rate cuts, tightening of credit policy along with uncertainties in crude prices behaviour, we feel RBIs concentration on maintaining inflation, M3 expansion, and GDP growth is warranted.

In our view, some steps towards easy capital flow for infrastructure and some relaxation on ECB rules would have been welcomed by all sectors of the market. With limited depth of the local debt market, the infrastructure sector will still find it difficult to do financial closure of their projects at an appropriate benchmarked cost. Also, can RBI not think of an alternate instrument/structure to sterilise the dollar inflow into the market This is imperative since to control M3 expansion and the consequent inflation, RBI has long stopped intervening in the forex market which would have helped stabilise the rupee value. Can the inward remittances be parked abroad and the respective amount of rupee resources be delivered from the central banking system through some predetermined methodologies to take care of the following items like rupee appreciation, M3 expansion, inflation, inflow of growth capital to the proposed recipient of the debt and equity capital We have a lot of expectations there.

The writer is group president (finance) & CFO, Hinduja Group