RBI's move in line with trend in rest of world

The Reserve Bank of India’s move to tighten liquidity is in keeping with the stance taken by central bankers worldwide. Globally, the process of withdrawal of accommodation in monetary policy is being vigorously pursued.

Since mid-February, 2007, among the leading central banks, the European Central Bank and the Bank of Japan have raised key policy rates by 25 basis points each, while the People’s Bank of China raised one-year lending rates by 27 basis points and the reserve requirements by 50 basis points.

On Thursday, the chairman of the US Federal Reserve Ben S Bernanke sounded a fresh warning on inflation, sparking concerns that interest rates may rise. Other central bankers have also expressed concern over the increase in liquidity.

However, there has been no change in the policy rates of the US Federal Reserve, the Bank of England, the Bank of Canada, the Reserve Bank of Australia and the Reserve Bank of New Zealand, all of which had undertaken prior policy action.

Economists point out that high growth and inflation are global trends and central bankers have to take policy action in conjunction with their peers across other markets.

India’s integration with global markets has made things more difficult for central bankers. For instance, the present hike in interest rates will make Indian markets more attractive for foreign funds.

If fund inflows do perk up, the rupee will head towards the 41 level making Indian exports less competitive. This will force RBI to intervene and buy dollars. By purchasing dollars in the forex market, RBI will end up releasing more rupees thus, adding to the liquidity.

According to RBI, continuation of accelerated external inflows has resulted in accretion of $18.6 billion to the foreign exchange reserves, taking their level from $179.1 billion at the end of January 2007 to $197.7 billion on March 23, 2007.