Review policy lays thrust on balancing growth, financial stability

Mumbai, Oct 30 (UNI) The mid-term review of policy by RBI continued to lay its thrust on balancing the contrary objectives of sustaining growth and achieving financial stability.

The management of external driven liquidity remains the key area of focus to achieve financial stability, Quantum Asset Management CEO and CIO Devendra Nevgi said.

The large capital flows were clearly hindering the monetary policy effectives and pushing the money supply beyond RBI's target (17-17.5 per cent) that was pushing the asset prices (stocks/real estate) higher.

The CRR hike of 50 bps was a pre-emptive sterilization move to stem the capital flows that may accentuate as the Federal Reserve is expected to cut the interest rates tomorrow.

RBI slashed its medium term inflation target to 3 per cent (from 4-4.5 per cent) and clearly mentioned that it will not hesitate to use various direct and indirect tools to control inflation and inflationary expectations. The forward looking view on agricultural sector was positive that will support RBI's view.

RBI further deregulated the Foreign Exchange markets by allowing oil companies and importers/exporters to actively hedge there exposures via the options route.

Although RBI kept its GDP growth rate target at 8.50 per cent, it acknowledged a little slack in the industry and services sector.

RBI's focus is clearly on management of the global liquidity (capital flows) and attaining risks of financial instability that may occur due to adverse developments in global markets.

Meanwhile, Religare Securities Institutional Business Head Sangeeta Purushottam said, ''The Cash Reserve Ratio (CRR) hike is aimed at sterilizing the impact of excess liquidity because of the large Forex flows, we expect banks to absorb the incremental cost through a lowering of deposit rates so bank earnings will not be impacted. We expect the equity markets to shrug this off because of the strong liquidity flows - both domestic and foreign.'' More UNI