RBI Mid-Term Review of Annual Policy Statement for the Year 2007-08

The Reserve Bank of India (RBI) in its Mid-Term Review of Annual Policy Statement for the Year 2007-08 wiped out any hopes of interest rate easing in the near future, as it hiked Cash Reserve Ratio (CRR) i.e. the amount of money banks must hold in cash, by 0.5 per cent to 7.5% to suck out liquidity despite inflation at a five-year low. Good point about the CRR hike that it will stabilize liquidity and further hike in interest rates is unlikely.

We can see this hike by linking the same as a means of liquidity management rather than a signal to check inflation. This move is expected to suck additional liquidity to the extent of Rs. 15,000 Crore from the banking system. This policy echoes concerns raised by Government of India on massive capital flows into the country, Reserve Bank of India (RBI) in its policy document said managing the inflow, related liquidity implications and overall stability were the biggest challenges of monetary policy. Today, in India, we face a problem of enormous capital flows. This is a completely new situation for us. Capital is welcomed but we must learn how to manage capital, how to absorb capital. Read further at this link

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