Echoing concerns raised by Finance Minister P Chidambaram on massive capital flows into the country, the Reserve Bank on Tuesday said managing the inflow of foreign funds is the biggest challenge of monetary policy.
"On the domestic front, the biggest challenge is the management of capital flows and the attendant implications for liquidity and overall stability," RBI said in its mid-term review of the monetary policy released today.
RBI today raised the requirements for banks to keep cash with central bank (cash reserve ratio or CRR) by 0.5 per cent to 7.5 per cent as part of efforts to suck excess liquidity. It said of the USD 62 billion of forex reserve added till October 19, USD 48 billion have been built up since end-June.
Earlier in the day, Finance Minister P Chidambaram also said India faces a problem of huge capital inflow and needs appropriate regulations as well as risk management systems to avoid any potential shocks.
"Today in India, we face a problem of enormous capital flows. This is a completely new situation for us. We welcome capital but we must learn how to manage capital, how to absorb capital," he told industry captains in New Delhi.
India has seen capital flows increase substantially this fiscal. Foreign exchange reserves have risen by $62 billion to $261 billion till October 19, while net foreign institutional investments have crossed $17 billion. FIIs invested about $8 billion in October alone. Record inflows have also pushed rupee to a nine-year high against the US dollar, hurting exports.