The Hindu Business Line : `RBI keeping a close watch on inflation'

Monetisation of Government deficits would also be completely discontinued in line with the road map prescribed by the Fiscal Responsibility and Budget Management Act.

Bangalore , Sept. 16

THE Reserve Bank of India was keeping a close vigil on inflation and would resort to monetary policy intervention when necessary, according to Dr Rakesh Mohan, Deputy Governor.

Speaking to reporters here today, Dr Mohan said, "We will make measured response as and when necessary." He also ruled out any changes in the foreign exchange policy with reference to intervention in the markets.

Earlier, speaking at the FICCI conference on banking, Dr Mohan said that the monetary policy would continue to focus on price stability. This was because the inflationary expectations in the domestic market were down to about 7 per cent in line with the rest of the world. Such expectations, he said, were over 10 per cent in the last decade.

He also said that the RBI was also focussing on deepening and broad basing the debt markets in the country, by involving more players. At present, the players in the market were entirely banks, insurance companies and financial institutions. He said that as banks move more to credit, there would have to be more players in the debt markets. The corporate debt market need to be deepened to prevent any "cartelisation of banks" in a deregulated environment.

He said that the RBI was not in favour of any sovereign external commercial borrowing, despite the recent upward movement in interest rates. Such a policy had in fact ensured stability in the domestic financial markets unlike in the case of Latin America and East Asia during the transition to capital account convertibility. The preferred option of financing the fiscal deficit would be the domestic markets, he added.

Moreover, he said that next year, monetisation of Government deficits would also be completely discontinued in line with the road map prescribed by the Fiscal Responsibility and Budget Management Act.

The transition to full capital account convertibility would continue to be slow. This gradual transition had also helped the banks to ensure financial stability in the markets. But the process of intervention in the foreign exchange markets would continue, he added.

Referring to the progress of financial sector reform, Dr Mohan said that the reform had resulted in the domestic banks' average profitability reaching to 1 per cent of assets in line with international best practices. The profitability in the US currently was 1.5 per cent of the assets, he added.

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