It left the short-term operational repo and reverse repo rates untouched. The hike in CRRthe portion of cash that banks must keep with RBIcomes into effect in a single tranche from November 10. This means consumers will have to live with existing interest rates for the time being.
Unveiling one of the most keenly watched mid-term reviews of annual monetary policy in recent times, RBI governor Yaga Venugopal Reddy underscored his priorities by saying: At the current juncture and looking ahead, on the domestic front, the biggest challenge for monetary policy is the management of capital flows and the attendant implications for liquidity and overall stability.
Reddy also added that another concern was the rapid escalation in asset prices, particularly equity and real estate, driven significantly by capital flows.
However, as far as the domestic situation was concerned, the policy review said domestic conditions, by and large, had evolved in line with the objectives and expectations set out in the annual policy statement in April. This seemed to justify RBIs decision to keep key operational rates unchanged.
RBI held the real GDP growth target for 2007-08 at 8.5%, as reiterated in the first quarterly review. The policy endeavour, RBI said, would also be to contain inflation close to 5% in 2007-08 and the resolve would be to condition expectations in the 4-4.5% range so that an inflation rate of 3% becomes a medium-term objective. Inflationary expectations, Reddy said, appeared to be well anchored.
Despite maintaining the status quo on short-term rates, RBI has kept its options open. The Reserve Bank will continue with its policy of active demand management of liquidity through appropriate use of the CRR stipulations and open market operations, including the MSS (market stabilisation scheme) and the LAF (liquidity adjustment facility), using all the policy instruments at its disposal flexibly, as and when the situation warrants, the policy review stated. For now, the bank rate remains at 6%, the repo rate under the LAF at 7.75% and the reverse repo rate at 6%.
RBIs monetary policy stance, therefore, remains virtually unchanged, barring one critical paragraph. The central bank said it would be in readiness to take recourse to all possible options for maintaining stability and the growth momentum in the economy in view of the unusual heightened global uncertainties, and the unconventional policy responses to the developments in financial markets.
The quality of growth is seen better, going forward. Investment demand is also increasing, Reddy said. Higher oil prices, however, continue to be a cause for concern. The governor said growth in broad money supply (M3) had been higher than what RBI anticipated. Threats to inflation, Reddy said, emanate not only from domestic liquidity conditions but also from the underlying global pressures.
To provide depth to the foreign exchange market, RBI permitted oil companies to hedge their forex exposures by using over-the-counter/exchange-traded derivatives up to a maximum of one year forward.