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Dr D. Subbarao, Governor, Reserve Bank of India, on Thursday said that some amount of rupee depreciation and oil prices have already been factored in RBI's assessment of seven per cent WPI (wholesale price index) inflation for March 2012.
However, the apex bank will intervene in the forex market if there is a sharp movement in exchange rate which is likely to impair macroeconomic stability. “Rupee depreciation over the last three months is a result of developments outside India, particularly Europe. Exchange rate is always on our radar,” Dr Subbarao said at a press briefing after the RBI board meeting here on Thursday.
The rupee has depreciated against the dollar by about 14 per cent since August this year. “Rupee's depreciation is adding to inflationary pressures,” Dr Subbarao said. The apex bank will come out with a ‘definitive statement' on the local currency at its forthcoming policy meeting on December 16.
Rupee depreciation was mainly on account of low dollar inflows, and it calls for some specific measures by the policymakers, Dr Subbarao said. “We should attract more inflows into the country, and this the RBI has already done by way of adjusting the ceiling for External Commercial Borrowing, adjusting the maximum interest rates for non-resident Indian deposits, and increasing the limit for foreign institutional investors in sovereign and corporate debt, among others.”
The apex bank, he said, would also take additional measures as and when required.
Liquidity issue
Dr Subbarao said the RBI will take necessary steps to ease liquidity. The liquidity deficit in the banking system has widened beyond the central bank's guidance of plus/minus one per cent of net demand and time liabilities, amounting to about Rs 60,000 crore, thereby indicating that some banks were facing liquidity constraints.
“The liquidity situation is being monitored on a daily basis. We will take all necessary steps to ease it. We are aware of the advance tax payment situation. We will take that into account while assessing the situation,” he said.
Under the open market operations, the central bank repurchased bonds worth Rs 9,000 crore on Thursday to ease liquidity, in addition to bond buybacks of about Rs 15,000 crore over the previous two weeks.
CRR to be cut?
Responding to a query on the possibility of a cut in cash reserve ratio, he said, “Whatever we might decide on CRR or otherwise, you will have to wait for the mid-quarter statement.”
Foreign direct investment in retail would help attract foreign investment and combat inflation, Dr Subbarao said.
Inflation
Food prices have responded to the good monsoon, the RBI Deputy Governor, Dr Subir Gokarn, said. “There are structural factors that are driving food inflation, particularly of protein items, and that is something we should be watchful of.”
On the possibility of further rate hikes, Dr Subbarao said that further rate action will depend on some unanticipated developments.
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