Reserve Bank Deputy Governor Subir Gokarn on Thursday said it was important to ensure adequate level of liquidity in the system as the momentum of recovery picks up.
Reserve Bank Deputy Governor Subir Gokarn on Thursday said it was important to ensure adequate level of liquidity in the system as the momentum of recovery picks up.
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His comments come at a time when there is intense speculation at different quarters that the apex bank may take steps such as increasing the cash reserve ratio (CRR) to tighten its monetary stance in view of rising food inflation which is at a high 18.65 per cent for the second week of December.
CRR is the amount banks need to deposit with RBI without interest.
Gokarn also expressed his concern over the possibility of food inflation spreading to broader economy. "The driver of inflation is mainly the rapidly-growing prices of food items. As the economy picks up, food inflation spilling over to the wider economy is a risk. This is something we have to be worried about," he said.
Observing that Indian economy is in the middle of the recovery and gaining momentum, he said "supporting recovery by ensuring that liquidity does not become a constraint is important".
At present, liquidity on an aggregate level is sufficient, providing a level of cushion to the reasonably accelerating economy, he added. Food inflation eased a bit at 18.65 per cent in the second week of December from decade's high of close to 20 per cent a week ago.
The Deputy Governor did not rule the possibility of RBI revising its forecasts on GDP and credit growth in its January monetary policy review. "Considering that we are coming to the end of the year, there is nothing much that may change from now," he quickly added.
The current high inflation is a domestic phenomenon and monetary policy has only an indirect role to play in containing it, Gokarn said. However, the tools to be used to attain this objective have to be decided depending upon the prevailing situation, Gokarn said.
"Our concern is to prevent this (food price inflation spilling over to the economy)...as to which tools are appropriate is dependent upon the (prevailing) situation," Gokarn, who was previously with global rating agency S&P, said.
Higher dependency on Government spending for recovery, high interest rates and potential surge in capital flows could pose risks to policy-makers in the period ahead, he observed on a cautious note. He also noted that growth in bank credit was not in line with the economic recovery and said interest rates remain sticky.
Gokarn said the government's borrowing in the current fiscal is unlikely to exceed the estimates and the current account deficit is likely to remain moderate this year.
When asked whether the apex bank would revise its forecasts on GDP and credit growth in its January monetary policy review, Gokarn said there was a possibility of this. "There are possibilities for doing both. Considering that we are coming to the end of the year, there is nothing much that may change from now," he said.
An important policy consideration before the apex bank presently is to maintain a balance between growth and inflation, Gokarn said, adding that the country's high growth rate poses a challenge to the timing of an exit strategy.
Gokarn also said that there was no pressure on managing the rupee presently as foreign capital inflows are not too large. However, moving ahead, the central bank will have to see the potential surge in capital inflows as one of the major risks to the economy, Gokarn said.
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