<b>Credit Policy</b>: Forex mgmt big challenge

Echoing concerns raised by Finance Minister P Chidambaram on massive capital flows into the country, Reserve Bank of India (RBI) today said managing the inflow of foreign funds is the biggest challenge of monetary policy.

"On the domestic front, the biggest challenge is the management of capital flows and the attendant implications for liquidity and overall stability," RBI said in its mid-term review of the monetary policy released today.

RBI today raised the requirements for banks to keep cash with the central bank (cash reserve ratio or CRR) by 0.5% to 7.5% as part of the efforts to suck out excess liquidity. It said of the $62 billion of forex reserves added till October 19, $48 billion have been built up since end-June.

Earlier in the day, Finance Minister P Chidambaram also said India faces a problem of huge capital inflows  and needs appropriate regulations as well as risk management systems to avoid any potential shocks.

"Today, in India, we face a problem of enormous capital flows. This is a completely new situation for us. We welcome capital but we must learn how to manage capital, how to absorb capital," he told industry captains in New Delhi.