The mid-term review of monetary policy is a reflection of growing integration of the Indian economy with global macroeconomic conditions, with management of capital flows and resulting liquidity gaining prominence in setting and administering monetary policy goals.
The 50 basis points hike in CRR has to be seen in the light of persistent and heavy capital inflows, incomplete pass-through of crude oil prices (which is at its record high) and their future implications for inflation management.
Status quo on monetary policy continues with key rates being held steady in line with the central banks' emphasis on price stability and orderly financial markets. The magnitude of inflows and their impact on asset, forex and credit markets remains the key concern and will have to be carefully watched in future.
What is heartening to note is the economy continues to power ahead, with agricultural recovery holding ground and industry and services sectors keeping their trend intact. This is reflected in the RBI keeping its GDP target intact while reiterating its focus on reigning in inflationary expectations and money supply growth.
The biggest positive of the policy is the liberalisation of several foreign exchange hedging transactions which will increase the flexibility available to organisations, in the light of the volatility that has characterised forex markets in the last 6 months.
Allowing organisations to write covered options and receive premium in both rupee and cross-currency is the latest in a series of measures towards an eventual free-float of the rupee, while permitting authorised dealers to offer American options as well as run cross-currency options book goes some way in allowing organisations the flexibility to protect their foreign currency exposures, although one would have liked to see some relief on increasing the quantum of hedging for the exporting community.
Focus on strengthening risk management framework in banks and improvement in the credit delivery mechanisms, particularly to SMEs and agriculture are welcome steps.
The policy takes cognisance of the key concerns facing the economy while going a step further in aligning domestic market practices to those prevailing in international foreign exchange markets.
