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RBI sees no Budget trigger for change in rate, inflation outlook

Our Bureau

Dr Rakesh Mohan

Chennai , July 8

THE Budget provides no reason to the Reserve Bank of India for changing its outlook of either the interest rate or the inflation expectations, RBI's Deputy Governor, Dr Rakesh Mohan, said here today.

"I don't see any change in the interest rate being brought about by the Budget," he said.

Dr Rakesh Mohan noted that the Budget gave two strong messages — fiscal consolidation and greater emphasis on encouraging investment in the real sector.

Asked for a view on the Government's market borrowing programme, he said that while he did not have the time to look at the exact numbers, "I think the market borrowing programme will be within the framework."

"The fiscal deficit at 4.4 per cent of GDP is a very encouraging sign, and so clearly no change in our expectations either to do with market borrowing," he said.

On inflationary expectations, Dr Rakesh Mohan said that the RBI, while formulating its annual policy statement (May 18) had "taken on board" international developments such as firm oil and commodity prices.

He observed that the price rise of the last couple of months was "internationally induced" and mostly "related to Chinese demand".

Dr Rakesh Mohan was here in connection with the meeting of the RBI's board of governors today.

"The policy action of China seems to be in terms of cooling their economy somewhat. Depending upon exactly what action comes out when the Chinese economy starts cooling, there will be less pressure on commodity prices internationally," the Deputy Governor said.

"Now the international view does not seem to say that there are expectations of prices going up a great deal in the coming months," he observed.

Further, he said, "You must remember, most of us are geared to looking at inflation in terms of Wholesale Price Index. But if you look at the consumer price index, it is about 3 per cent. The difference between the WPI and the CPI is that in WPI the weight for food products is much lower, as the index includes things such as oil and metals. People don't eat metals. The weight of food products in the CPI is much higher. The prices of essential commodities such as food products have been very benign."

Asked if the RBI would allow the forex reserves to be used, say, for making cheap dollar credit available to exporters, Dr Rakesh Mohan said, "First of all, if the reserves are used for any purpose of this kind, they would, by definition, cease to be reserves. Second, if the reserves are brought back into the country, it will add to the supply of dollars, which is in any case in excess. He pointed out that in the last few years the foreign currency lending to exporters "has gone up by large proportion".

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