India's solid economic growth amidst heightened global uncertainties has resulted in it becoming a highly attractive investment destination.
The management of capital inflows has emerged to be the biggest challenge for the monetary policy.
The RBI has done extremely well in remaining ahead of the curve by assigning high priority to liquidity management in its mid-term credit policy review, while continuing to emphasise on both, financial and price stability.
RBI has increased the cash reserve ratio (CRR) by 50 basis points while maintaining a status quo on interest rates.
The decision to hike CRR is fully justified considering the growth in monetary aggregates, amidst solid domestic economic growth and easing monetary policy in the US. Money supply growth at 21.8 per cent has been running well above the RBI's comfort zone of 17-17.5 per cent.
The 50 basis points CRR hike would impound close to Rs16,000 crore of excess liquidity from the banking system. Further easing in the Fed's monetary stance will accelerate global liquidity into India.
RBI governor, Dr Y V Reddy, has stated in the policy that emerging markets by and large have better macroeconomic environment than before, particularly India.RBI has in its policy said that inflation and inflationary expectations would continue to demand priority in policy monitoring.
High international prices of global crude oil (currently over $90 a barrel), food and metals and its incomplete pass through have been well read by the RBI. Strong capital flows are feeding into rapidly growing asset prices, real estate and equity in particular.
The central bank has thus done well in keeping the policy (reverse repo, repo and bank) rates steady, reflecting the need to ensure overall price stability while maintaining the growth momentum.
The monetary policy has taken measures to rein in inflation expectations and is apt in adopting the 'wait and watch' policy in its approach.
This, especially, in the wake of increased downside risks to the global economic outlook, accentuated by the recent financial market turmoil
