The Monetary Authority of India, vis., The Reserve Bank, kept the interest rates unchanged belying the expectations of the market. This has been done to maintain the financial and price stability. In its third quarter of review of Credit Policy, the Apex Bank, did not also change its projections of the growth rate from 8.5% and inflation close to 5% in 2007-08.
With the Federal Reserve cutting the rates by 0.75%, there were expectations that the RBI would follow suit thus setting a turn towards a softer interest rate regime in order to avoid a possible slowdown of the economy. But inflation is not a politically acceptable alternative for the Finance Minister, Mr.P.Chidambaram and the policy implicitly endorses the subjugation of politics over economics;but at the same time, the RBI did not hike the key rates thus striving for a balance between growth and inflation.
Heavy Capital Inflows and ever increasing Oil-prices are two other factors worrying the monetary authorities. The Bank has called for decisive macro level policy initiatives towards the capital inflow, the other issue viz., the oil prices is beyond its control. However, suitable fiscal initiatives by the Government in terms of duty reduction etc may to some extent contain the adverse effects.
The impact of the global financial developments which are to say the least volatile in nature, is another issue dealt by the bank vis-a-vis the banking system within the country. It had asked banks to review large currency exposures so that it does not adversely impact their balancesheets. They have also been asked to monitor corporate activity in terms of their treasury/trading activity, so that it does not result in the impariment of quality of their assets.
Some of the key insturments of monetary policy also remain unchanged. The Benchmark bank rate is kept at same 6%. This is the rate at which the RBI lends to Commercial Banks. The shortterm repo-rates and reverse reporates were also kept unchanged at 7.75% and 6% respectively. Repo-rate is the rate at which the liquidity is injected into the system and reverse the exactly the opposite, i.e. at whchi theliquidity is sucked from the system.
In effect, the Apex bank has followed a conservative approach to the management of monetary policy. Though it has taken into account the fact the the domestic economy is in a better shape than many of its counterparts, still it has treaded a cautious path to shield the Indian Economy from a shock if the recession looming large before the U.S. Economy becomes a reality.
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