Instead of increasing Repo rate and CRR, Reserve Bank of India (RBI) should now focus on framing sound policy for foreign capital inflow because it is increasing the liquidity and without specific policy, RBI cannot control liquidity and inflation. Instead of making credit costlier, it would be better for the economy that RBI promotes equity finance system under long term foreign capital inflow policy dedicated to provide finance for financially sicker segments of the economy.
Inviting foreign capital inflow without proper policy to allocate those resources means to invite higher rate of inflation. There is no control or monitoring system how the corporate sector is using this foreign capital inflow to meet their financial requirements on one hand and save taxes on the other. The cost of capital inflow utilised by corporate sector is being paid by general public. Before we move further ahead in inviting more foreign funds, RBI should well define foreign capital inflow policy so that excess of liquidity may not inflate the economy, but boost growth rate. This section needs RBI’s attention to divert funds towards the unorganised sector which suffers a lot for capital crisis and could hardly avail equity funds. This attention would not only help tame inflation, but achieve foster inclusive growth as well.
We have seen that by increasing Repo rate and CRR since July 2006, RBI has not controlled inflation, but increased it with higher cost of credits which not only increased the output prices but also decreased the growth rate. Now, RBI should review its policy on credit, liquidity and foreign funds. If RBI reviews it thoroughly, it would be clear to all that instead of costlier credit and tight liquidity, the economy needs planned liquidity and credit policy with thrust on promoting equity finance to the dejected unorganised sector which miss opportunities to grow in short of suitable credit supply. So, RBI should now promote equity deposit and finance to tame inflation and allow foster inclusive growth. This is nothing but very much resembles to allowing Islamic banking in India which stress for equity deposit and finance instead of debt finance.