Rupee fall not to majorly impact year-end inflation target: RBI | business | Hindustan Times
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Rupee fall not to majorly impact year-end inflation target: RBI

Contrary to fears expressed by some experts, Reserve Bank deputy governor Subir Gokarn today said the continued and steep fall of the rupee will not have an impact on the central bank's year-end inflation guidance.

business Updated: Dec 03, 2011 19:25 IST

Contrary to fears expressed by some experts, Reserve Bank deputy governor Subir Gokarn today said the continued and steep fall of the rupee will not have an impact on the central bank's year-end inflation guidance.

"Our projection suggests that the rupee fall will not change the anticipated downward trajectory of inflation," Gokarn said in a video address at a CFO event organised by the industry body CII in Mumbai. The rupee has depreciated by over 15% in the last three months prompting some experts to question whether RBI's fiscal-end inflation target of 7% would be met as over 10% of the present inflation is imported. Core inflation for October stood at 9.73%.

"The extent of depreciation of the rupee in itself heightens inflation risks," Gokarn admitted as factors like the global crude oil prices remaining firm will only accentuate the troubles. However, he added, "typically, growth deceleration precedes inflation deceleration. So, the pattern playing out now is consistent to the expectation that inflation will begin to moderate over the next few months." Gokarn, however, also conceded that one of the reasons for the dip in growth is the central bank's anti-inflationary monetary policy that has seen 13 repeated hikes over the past 20 months.

Meanwhile, Gokarn said liquidity is likely to be under pressure for some more time amid factors like advance tax payment. "The broad objective is to ensure that these conditions do not hamper the smooth functioning of financial markets and disrupt flows to the real economy," Gokarn said. Overnight drawings by banks from the RBI"s liquidity adjustment facility have exceeded Rs 1,20,000 crore and RBI had said in the past that deficit has exceeded its targeted 1% of net demand and time liabilities (NDTL). The RBI has also purchased government securities of over Rs 14,000 crore (against a target of Rs 20,000 crore)from the money markets in two instalments in the past eight days as part of its efforts at infusing liquidity into the system.

However, Gokarn hinted at a pause in OMOs, saying, "we must guard against the risk of excessive accommodation since this will conflict with the current monetary policy stance... fiscal deficit cannot be accommodated fully by OMOs." OMOs are the "first preference" of RBI while injecting liquidity and there is an opportunity to raise up to Rs 2.74 lakh crore through the window as banks' government bond holdings are at 29%, 5% over the prescribed SLR cap of 24%, he said.