Previous

Page - 2

Increase in CRR with the removal of cap on reverse repo will affect bond yields positively. The hike in CRR is also likely to suck out liquidity worth 15,000 crore from the system.

As expected, RBI kept the bank rate unchanged at 6%, repo rate at 7.75% and reverse repo rate at 6%.
This was on expected lines as interest rates almost peaking and inflation moderating.

The policy has also maintained the projected rate of money supply at around 17.0-17.5% for 2007-08 in consonance with the outlook on growth and inflation. Consistent with the projections on money supply, the growth in aggregate deposits was placed at around Rs. 4,90,000 crore while non-food credit was projected to decelerate to 24-25% in 2007-08 from 29.8% over 2006-07.

"While non-food credit growth has decelerated, the acceleration in money supply and reserve money warrants an appropriate response," RBI policy said. Early fiscal indicators suggest that Centre's fiscal deficit is evolving as budgeted and is on course to meet the FRBM targets. However, net capital flows have been very strong so far in the current fiscal. The governor's argument for ensuring 'financial stability' is taken seriously by those in the financial market. The concerns seem to be on account of high inflow of FDI and portfolio investment in the markets. Also volatility in both money and equity markets in the Asian and US markets seem to have pointed out by the RBI Governor.

Another highlight of this credit policy is RBI's precaution of the risk associated with Hedge Funds, which are private, largely unregulated pools of capital. Their role has risen significantly in the recent past. Managers of these funds follow complex investment strategies to leverage portfolio size through derivative contracts. Their potential for imparting risks to the financial system has always been there but now there can be a possible threat to overall financial stability.

Concluded.

Dr. Gourav Vallabh is at present Professor (Finance) at XLRI Jamshedpur.
He is a Certified Financial Risk Manager (GARP, USA), Chartered Accountant (ICAI, India), Company Secretary (ICSI, India), Ph.D. (UoR, India), M.Com., LL.B.
Currently, he is also associated with Govt. of Rajasthan in the capacity of Honorary Advisor to Ministry of Revenue.