Problem of Plenty: Hail RBI

Finally the rabit is out of central bank's hat that used the ruled out tool of CRR hike. Some how market was sitting largely on one side expecting rates to peak and should gradually start falling. RBI has received criticism from various treasury desks for doing the unexpected, citing the wrong measure

Lets look at central bank's action in the back drop of changed scenario. Unlike ten years back, craving for a pie of foreign funds, India todays faces a problem of abundance. The first three month for the fiscal received nearly $ 23 bn against the annyal target of $ 25 bn. Clearly India is an attractive destination for investments, but it calls for robust monetary management

The huge flows can simply fly away with same pace and cause severe shocks to the economy and needs proper channelisation of money in productive areas on a sustainable basis. Further in the short term surplus money gets created in the system and cause inflationary pressures. To manage this, it requires RBI to suck the liquidity out of system

Call money rate in last many weeks have remained below 1% , this scenrario appears dangerous when the economic is growing at 9% rate and inflation above 5%. Allowing abysmal low call rate persistently, may give a permamanent belief to banks who in turn start funding longer term assets with overnight borrowings

Give the urgency RBI was right in hiking CRR rate and removing cap on reverse repo borrowings. A lot more needs to be done by increasing the limit of MSS so as to remove excess liquidity. Parrallely India needs to evolve a sustainable FDI policy and a deeper monetary system

Once the economy opens up and the India gets used to the funds inflow and outflow, it should see the least intervention from central bank. Till then stance is right to have liquidity management and market needs to be ready to face frequent changes in policy