RBI Policy CRR hikes of 50 bps

New Delhi, Oct 30: The Mid Term Review of the Annual Monetary Policy announced by RBI today is on expected lines, said CII in a Press Release issued here today. However, keeping in mind the international trends in interest rates and particularly the indications coming in from the US, CII feels that the RBI could have considered an interest rate (Repo Rate) cut to go along with the CRR hike of 50 bps.

CII has observed that the hike in CRR would effectively suck out about Rs. 15500 crores from the system.

The press release said that CII has taken note of the statement, which says that the RBI would move “swiftly" in case of global developments.

The release also mentioned that CII feels that the RBI has clearly indicated that it is attaching more importance to liquidity compared to concerns on growth. The press release said that CII fully appreciates the RBI Governor"s difficulties in dealing with the twin challenge of managing liquidity and consequent inflationary expectations on the one hand and boosting demand and hence growth, on the other.

CII only wondered how the RBI would react in the eventuality of the US Federal Reserve cutting interest rates tomorrow, since another round of interest rate cut would increase the propensity of more foreign funds coming into India through the ECB route, which would obviously add to the concern of the RBI. This challenge of increased foreign exchange inflow would further get accentuated and consequent pressure on the rupee by expanding the interest rate differentials between India and the US.

However, a moderate cut in interest rate in India at this point of time would have probably dealt with this situation better, said the CII release.

The RBI announcement has allowed Oil companies to hedge foreign exchange exposures by using over-the-counter (OTC)/ exchange traded derivatives up to a maximum of one year forward. CII feels that this is an opportunity, which India could have leveraged by developing currency exchanges to facilitate such hedging, said the release.

CII also said that it has taken note of the RBI"s efforts at liberalising foreign exchange transactions, strengthening risk management in banks, migration to Basel II and fine-tuning of supervisory processes.

CII observed that the RBI has also attempted to develop an integrated financial market, improve credit delivery mechanism, particularly to agriculture and small and medium enterprises, which is welcome.

ANI
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