Hedging on stability

MONETARY POLICY MID-TERM REVIEW 2007-08/ VIEWPOINT

Gunit Chadha
Managing Director & CEO,
Deutsche Bank, India

RBI has rightly and admirably focused on stability, given the uncertainties and recent turmoil in the global financial markets.

It has continued to keep a watchful eye on risk of inflation, especially CPI, while ensuring that the growth momentum continues as India's GDP grows at 8.5 per cent in 2007-08. Its measures on allowing risk mitigation tools in forex hedging are welcome and are in alignment with the requirements of a fast globalising India Inc.

The CRR increase is a liquidity impounding measure (to withdraw about $ 4billion) and the status quo on rates is due to the assessment that overall economic growth impetus remains strong and inflationary expectations have not been sufficiently anchored.

As expected, the RBI has stated that in view of the elevated global food, metal and crude oil prices and high asset prices, inflationary risks are high, at the same time acknowledging the recent fall in reported wholesale price inflation.

RBI's heightened concern on capital inflows is clear from the repeated mentions in the policy, and suggests that the issue could engage RBI's attention regularly.

RBI's reiteration of focus by banks on risk management is very timely and appropriate. Forex hedging rules for corporates have been eased and they have been allowed to write covered calls and covered puts.

Authorised dealers have been allowed to quote American style options (in addition to European style options permitted till now) and write cross currency options. These are welcome measures and are in alignment with the requirements of a fast globalising India Inc.

Inflation and the nervous state of financial markets overseas are likely to remain concern areas and will receive its attention. RBI has heightened the degree of concern about spillover impact from global developments.