Friday, November 9, 2007

Any rise in interest rates would probably have intensified capital inflows into India

Sponging out the liquidity

The rise in CRR (cash reserve ratio), the sixth this year, will squeeze some liquidity from the financial system. “Yet, it should not hurt bank lending much, if at all, since banks are quite flush with liquidity,” observes Mr Ramkishen S. Rajan, Associate Professor, School of Public Policy, George Mason University, US. “This still begets the question why credit growth had slowed down in recent times.”

The tightening CRR policy clearly indicates to the markets that the RBI (Reserve Bank of India) is hawkish and is concerned about the liquidity flushing around in the system and views risks associated with this to far outweigh those related to possible growth slowdown, he adds, during the course of an e-mail interaction with Business Line, soon after the release of the mid-term monetary policy review.

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