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FM tells banks to catch the right signal

Finance minister P Chidambaram backs the Reserve Bank of India’s (RBI’s) move to suck out excess liquidity from the banking system, reports Gaurav Choudhury.
Hindustan Times | By Gaurav Choudhury, New Delhi
UPDATED ON OCT 30, 2007 10:40 PM IST

Finance minister P Chidambaram on Tuesday backed the Reserve Bank of India’s (RBI’s) move to suck out excess liquidity from the banking system but felt economic growth could beat the central bank’s projection of 8.5 per cent GDP growth for the current fiscal year.

“The RBI's mid-term monetary policy is a continuation of its policy announced the last time, except that it has realised that there is excess liquidity and has raised the requirement for banks to keep cash with the central bank by 0.5 percentage points,” Chidambaram said here.

The RBI on Tuesday increased the cash reserve ratio (CRR) by 0.5 percentage points to 7.5 per cent and retained its earlier GDP forecast of 8.5 per cent during 2007-08. “If the RBI projects 8.5 per cent (GDP growth), I expect it to be slightly higher,” he said.

The finance minister urged banks to draw the right message from the policy. “I am sure that banks will draw the correct message from the policy. The RBI has said we are ready to respond with short-term, medium-term and long-term measures if there are domestic or global developments,” he said.

Chidambaram also expected a moderation in real estate prices. “I still think they (real estate prices) are on the higher side,” he said.

Earlier in the day, speaking at the Fortune Global Forum, Chidambaram said India was facing a problem of capital inflows and there was a need to regulate them to prevent a financial crisis similar to the one triggered by the sub-prime market in the US. “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,” he told top executives of major multinational corporations in New Delhi.

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