Demand management of liquidity

Updated: Jan 30 2008, 04:58am hrs
The statement is on expected lines in view of concerns on inflationary pressures.Financial markets and the banking community at large expected a rate cut in the wake of the 75 basis points cut by the US Federal Reserve. Comfortable liquidity conditions, slowdown in credit offtake and rising capital inflows also prompted such an expectation. From the perspective of exchange rate management also, it was felt necessary as the differential between the US and us is clearly widening. But the RBI Governor has surprised one and all by maintaining status-quo and not altering any of the key rates.

There was a bit of disappointment initially, and the capital market and debt market reacted adversely. Inflation expectations seem to be a big worry for RBI. RBI has rightly given more weightage to domestic factors--persistence of aggregate demand pressures and stronger up side inflationary risks.

High food prices, oil prices sustained at elevated level and continued high prices of other commodities pose significant inflation risks. The inflation number is lower to the extent fuel price rise not passed on to consumers and there is a high probability that the government may pass a portion of the price rise on the consumers. Money supply growth at 22.4% on y-o-y is well above the projected trajectory of 17.0-17.5% and beyond central banks comfort level.

RBI has reiterated that liquidity management will assume priority and will be managed through appropriate and timely action. RBI will continue policy of active demand management of liquidity through appropriate use of CRR stipulations and OMO including MMS & LAF. RBI has maintained projection of overall real GDP growth in 2007-08 at around 8.5% and will respond swiftly to any slowdown in growth. Sterilisation of forex inflows is expected to continue.

The author is chairman & managing director, Union Bank of India