Focus on managing liquidity

Written by Shailendra Bhandari | Updated: Oct 31 2007, 06:36am hrs
The RBI policy was in line with expectations that the primary focus would be on managing liquidity. Some market participants did not expect the CRR to be raised today, because of the recent PN guidelines and their projected impact on moderating capital flows. However, this weeks spectacular rise in the equity markets may have accelerated RBIs resolve to keep a firm lid on excessive liquidity.

The RBI has also actually prepared the market for further hikes, if capital flows continue to be strong and money supply remains out of alignment with its projections.

This, and future CRR hikes are therefore to be viewed as liquidity mopping measures, rather than as interest rate signaling ones. Strengthening its case for a tight monetary policy, RBI has cited risks to consumer prices if international prices of oil, primary articles and metals were to be passed on to consumers.

While inflation may currently be well within RBIs projected band, the RBI has sounded a cautionary note. Against the backdrop of CPI well ahead of WPI, the RBI has not changed its key-signalling rate, i.e. the repo rate. However, with the global interest rate cycle turning and domestic interest rates appearing to have peaked, the RBI may signal lower rates when it reviews its policy in January 2008.

The measures with respect to derivatives are welcome and should see further development of the market in India, as more customers use these instruments to manage their currency risks.

The author is MD & CEO, Centurion Bank of Punjab