The 50 basis points increase in the Cash Reserve Ratio (CRR) to 7.50%, while keeping the bank rate and the repo and reverse-repo rates unchanged, should be clearly seen as targeting the excess liquidity and not as an interest rate signal by RBI. This was not unexpected given RBI's consistent focus on impounding the strong liquidity, including cross-border inflows.
RBI has maintained a GDP growth forecast of 8.5% and inflation close to the targeted level of 5% and has also noted that asset prices remain at elevated levels though real estate prices are showing signs of stability at these high levels. While recognising the lower headline inflation numbers coming into the policy, the governor has emphasised the risks emanating from higher food and oil prices. His fear of insufficient pass through of oil prices is a valid concern as well.
The review has continued with the RBIs policy of gradual liberalisation of the foreign currency market. Forex hedging rules for corporates have been eased and they have been allowed to write covered calls and covered puts. Authorised dealers have been allowed to quote American style options (in addition to European style options permitted till now) and write cross currency options. These are welcome measures and are in alignment with the requirements of a fast globalising India Inc., in need for risk mitigation tools for their growing global businesses.
Inflationary pressures and the nervous state of financial markets overseas are likely to remain concern areas for RBI and will receive its constant attention. RBI has clearly heightened the degree of concern about spillover impact from global developments.
MD & CEO, Deutsche Bank, India