Inflation vaccine from Reddy's Lab
MONETARY POLICY 2007-08
| The decision to keep the signalling rates unchanged has been prompted by concerns over a further increase in interest rates attracting more foreign inflows. This also means further appreciation of an already overvalued rupee. |
| A surge in net capital inflows "� to $27.3 billion in the nine months of 2006-07 from $13.5 billion in the same period a year ago -- and the RBI's intervention in the foreign exchange market ($11.86 billion purchases of foreign currency in February 2007) to prevent the rupee from rising had increased the money supply and stoked inflation. |
| This militated against the tight monetary policy stance and the RBI had to swiftly reinforce the measures already taken since September 2004 for maintaining price stability and anchoring inflation expectations. |
| The Governor acknowledged the policy complications in his statement today. "The enduring strength of foreign exchange inflows has complicated the conduct of monetary policy," he said, adding, "higher interest rates increase the possibility of further capital inflows and pose risks to financial stability". |
| All this does not mean that no rate increases are likely in the rest of 2007. There are limitations to the extent to which the RBI can keep neutralising the liquidity infusion caused by interventions in the foreign exchange market. The best weapon thought of was to discourage inflows as far as possible and allow greater outflows by companies and individuals. |
| There could be some monetary measures before the RBI meets again on July 31 for the first quarterly review of its policy. |
| As it endeavours to contain inflation close to 5 per cent in 2007-08 (down from 5.0-5.5 per cent target in 2006-07), the RBI has lowered the GDP growth target to 8.5 per cent from 8.5-9.0 per cent for 2006-07. |