RBI to take steps to address any liquidity deficit

Reserve Bank of India has expressed concern over a weak rupee fuelling inflation. According to Subir Gokarn, Deputy Governor, RBI, rupee depreciation does contribute to inflation, particularly due to the impact on unavoidable imports like oil.

“Whatever causes it — whether it is political or global developments — the rupee’s depreciation does contribute to inflation…,” Subir Gokarn told newspersons on the sidelines of a summit organised by the CII-Suresh Neotia Centre of Excellence for Leadership here on Friday.

The rupee closed at 54.47 to a dollar on Friday, compared with 54.14 on Thursday.

The headline inflation rate, based on the wholesale price index, rose to 7.45 per cent in October. Speaking to newspersons after RBI board meeting here on Thursday, RBI Governor D. Subbarao had said though inflation had come down from its peak, at the current levels of 7.5 per cent it was still high.

Liquidity

Gokarn said the RBI would take steps to address liquidity deficit in the banking system, if required.

The central bank decided to conduct open market operations of Rs 12,000 crore on Tuesday based on the assessment of current liquidity situation.

“We have already announced one OMO and one more will be done next week because there may be some pressure from the (corporate advance) tax payment due on December 15. So it’s an ongoing attempt to assess liquidity and to make sure the pressure is not severe,” he said.

Gokarn said the central bank sees the overnight call rate as an indicator of the liquidity situation. The call rate has been close to RBI’s repo rate. “It (the call rate) has not shot up, which would suggest that liquidity is within comfort zone,” Gokarn said.

On loan quality, Gokarn said that there is some macroeconomic cyclical influence on the pattern of non-performing assets (NPAs) in the Indian banking system. However, NPAs would start fading once business cycles start to turn.

While the magnitude of NPAs was clearly a problem for banks, the RBI did not see a threat from capital adequacy issues.

FDI in retail

The RBI was positive on the prospects of FDI in retail. Food prices was one of the biggest drivers of inflation, he said.

“We have both a productivity issue and a distribution issue on food prices. So, anything that will help improve productivity and help reduce distribution costs is something that will contribute to long-term inflation management,” he said.

shobha.roy@thehindu.co.in

(This article was published on December 7, 2012)
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