RBI says upside risks to inflation remain
Mumbai: India's headline inflation is not easing as fast as the Reserve Bank of India (RBI) would like it to and upside risks remain, Subir Gokarn, a deputy governor at the RBI said on Wednesday.
India's headline inflation eased in line with expectations to 7.48 percent in November, its lowest level in a year. However, food inflation, which has a weightage of nearly 15 percent in the wholesale price index, has accelerated for two consecutive weeks snapping a seven-week easing trend.
Gokarn said food prices were falling but not as fast as the RBI would like them to.
"Downside risks to growth are abating and upside risks to inflation are increasing. So that is the balance that we are now focussing on in terms of potential action," Gokarn said.
To add to the government's woes, onion prices have shot through the roof, a development which is sure to feed into the weekly food inflation figures.
Indian state-owned oil marketing firms have already raised prices of petrol sold in India and there is talk of a hike in diesel prices soon. If that comes through, it would lead to a spike in inflation, putting the RBI's end-March projection of 5.5 percent at risk.
Gokarn also warned that another threat to moderating inflation was high global commodity prices, which had been flagged by the RBI in its December policy review.
LIQUIDITY WOES
While tight liquidity conditions have aided better monetary policy transmission, the RBI recently introduced cash-easing measures, including a bond purchase worth 480-billion-rupees ($10.62 billion), to support a cash-starved market.
Gokarn said the measures would help bring back the liquidity situation into its comfort zone over time. He had earlier said the RBI was comfortable with cash in surplus or deficit of 1 percent of deposits, which is about 500 billion rupees.
"We do have a trajectory which will take the liquidity situation close to the 1 percent boundary as we go along. Obviously that is something we expect to happen over a period of time. It is not something we expect to see over night."
The deputy governor said there was a mismatch between the rate of growth of bank credit and deposit mobilisation, which has made the liquidity deficit persistent in nature.
Official data from the RBI showed that bank loans rose 23 percent on year as of Dec. 3, while deposits were up 15 percent from a year earlier.
A huge government surplus cash balance with the RBI, which includes an estimated 550-600 billion rupees in advance tax, has also aggravated the liquidity situation.
However, the deputy governor said that scaling down of the government's cash balance is clearly on the cards.
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