Mid term review of Credit Policy

Reserve Bank of India (RBI) on October 30, 2007 made public its mid term review of credit policy. RBI left statutory interest rates unchanged and increased the amount of cash that banks are required to keep with RBI i.e. Cash Reserve Ratio (CRR) by 0.5% to 7.5%. The CRR hike will suck out Rs.16000 crores excess liquidity from the banking system. The RBI governor said still enough liquidity would be left to support economic activities. The RBI left repo, reverse repo and bank rates unchanged. RBI felt that inflationary expectation in the country is still high, mainly because of high global crude price and also high price of food, metal and commodities, which are not passed fully to consumers. Hence the present inflation rate of 3.1% based on WPI indicated suppressed figure. Reserve Bank also expressed its concern over the created by huge foreign fund inflows which can fuel inflation. The CRR hike will try to stabilize the economy. As RBI do not pay any interest on CRR , the cost of the fund will be passed to consumers which will increase the interest rates on credits given by bank and thus will control demand and put a check on inflation.
But there is a problem because of high liquidity and slow growth in credit off take, the banks will be forced to bring down rates in near future. Banks have already cut deposit rates to bring down cost of funds but slow growth in credit makes the market very competitive.
RBI Governor Y V Reddy said, “The biggest challenge is the management of capital flows and the attendant implications for liquidity and over all stability”. Although some banks had started lowering rates in response to liquidity in system, this does not indicate lowering of interest rate will further continue. RBI has kept benchmark rates unchanged and there is no signal from the RBI of a broad based decline in interest rate. RBI is mainly concerned with global risks and trying to maintain inflation at 5 % for 2007-08.