In his statement, RBI governor Y V Reddy spoke about the “strong pace” in economic activity, gains in bringing down inflation, persisting inflationary pressures, the worrying aspects of foreign capital flows — especially hedge funds — and risks from global developments. “Growth continues to be strong and an 8.5 per cent growth projected was a good figure. Growth impulses are strong and we can be positive on growth,” Reddy said.

According to HDFC Bank chief economist Abheek Barua, “The RBI’s moves are an effort to pre-empt inflationary pressures that easy liquidity and low short-term rates could foster.

Reddy expressed concerns over the role of hedge funds. “With greater risk aversion going forward, with credit quality deteriorating and with the widening of credit spreads, the potential fragility of hedge funds could pose significant risks to financial market stability and to the prospects for financing and growth in the emerging market economies.”

Banking stocks remain firm

Under normal circumstances, banking stocks would have reacted negatively to a hiked CRR but we didn’t see such a reaction. The banking index was up 1.2 per cent. Only four banks out of 18 in the BSE Bankex saw a decline in their share price. SBI, which carries a 16 percent weightage in the index, was up 2.9 per cent, HDFC Bank was up 3.3 per cent and ICICI Bank was up 0.4 per cent. Says Emkay Share and Stock Brokers head of research Ajay Parmar: “The overall sentiment in the market is that there is enough liquidity. So the CRR hike will not have a big impact.” Sharekhan head of research Sandeep Nanda adds: “We don’t see any signal of a rate hike and the strong liquidity condition has held the market though the credit policy holds negative signals for bank earnings.”

... contd.