RBI now has control over managing short-term rates

Written by OP Bhatt | Updated: Oct 31 2007, 06:24am hrs
With inflation turning benign at this point, RBIs focus has shifted to the strength of capital inflows and liquidity management. In the current financial year so far, (up to October 19, 07) net inflows by FIIs at $21.2 billion against outflows of $933 million in the corresponding period last year highlight the changed context of India in the world economy.

Despite aggressive intervention, rupee has appreciated on the back of surging inflows. Thus, the attendant issue of liquidity overhang continues to pose a challenge for containing inflationary pressures. With increasing integration of Indian corporates and financial institutions with global markets, and with rupee expected to remain firm in the near term, the flexibility allowed to Indian exporters and importers to hedge their exposures will help corporates to shore up their profitability.

The immediate impact of the 50 bps hike in CRR will be to drain around Rs 15,000 crore liquidity from the system. The CRR hike, continuing with flexibility in daily liquidity absorption, will give RBI better control on managing short-term rates in the economy. RBIs attempt to bring RRB under CBS is welcome as it will cut down the operating cost of RRBs and will bring connectivity with the parent bank.

The overall policy stance of the RBI is to support growth on the one hand and curb inflationary expectations on the other. Its also ensuring adequate liquidity in the system with an eye on maintaining growth momentum in the economy.

The author is SBI chairman