Wednesday, October 31, 2007

RBI hikes CRR to 7.5%; other key rates unchanged

The RBI Governor, YV Reddy announced the credit policy in Mumbai today.
RBI has hiked the CRR by 50 bps to to 7.5% from 5%. However, the other key rates including the repo and reverse repo rates have remained unchanged.

The RBI's has raised the cash reserve ratio given the persistent rise in capital flows, but has otherwise left other policy rates unchanged. The central bank's main message is that the economy is in fine shape – agriculture is above trend, industry and services may slacken just a bit. So the GDP target remains at 8.5% and inflation at 5%

But the main threat is from global capital flows, which may only increase given easing by global central banks. Inflation, which has been successfully controlled so far, is also under threat from oil and food tightness. But the biggest threat is from capital flows, especially from unregulated private entities who invest in equities and real estate. These, with a lag, can increase aggregate demand and impact inflation.

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