We shall continue taking steps to curb inflation: RBI

The Union Budget is a day old now and reactions are coming in across the board. Discussing the steps taken by the FM to curb inflation, Rakesh Mohan, Deputy Governor of RBI says the RBI will continue taking steps to curb inflation.

Excerpts from CNBC-TV18's interview with Rakesh Mohan:

Q: Are the steps taken in the Budget to cut duties adequate to curb inflation?

A: Reductions in the customs duty is the peak. Coming down from 12.5% to 10% and the various other reductions he has announced in some specific sectors is obviously much more part of the overall customs tariffs, rationalization that is going on.

We are essentially moving towards international level regime and of course, it helps in inflation management. I wouldn't say just one measure, but it's the collection of measures from the supply side that have been taken by the government and the monetary measures that we have been taking for the last couple of years. It has to be a continuous effort.

Q: The RBI itself has taken a slew of measures and quite a few of them came in the month of February itself. Do you see them as sufficient immediately or do you think the manner in which inflation is raising at 6.6% and above, requires more immediate steps?

A: We have been taking more decisive actions for more than two years and of course we will constantly keep watching. I think we need to put this in context that the overall resource availability for growth has gone up in terms of the savings rate having gone up and the investments having gone up along with better absorption of external savings.

But perhaps the perception is what the government has talked about; perceptions of supply inelasticities and supply management, I think that is what the government has focused on. The Finance Minister has particularly focused on in his Budget speech. If the supply management measures can be taken, the supply elasticities can be improved, then demand management can be smoother.

Q: In the Budget, the government has also announced that it would be or is contemplating using a part of the Forex reserves in a manner that it funds infrastructure externally. Are you concerned, what would be your immediate reaction to this proposal?

A: As the Finance Minister mentioned, this proposal has come from the Deepak Parekh Committee on infrastructure and finance, which we have received recently. As the Finance Minister said in his Budget speech, this will have to be examined with reference to the legal and regulatory requirements and of course we will be doing that consequently.

Q: Coming to the government's borrowing programme, which came in at a lower level than even last year – Rs 1,9000 crore or thereabouts. Will that mean the amount of government securities available to the banks is going to be a little lower? How does that place the RBI's SLR cut programme?

A: The implication of the FRBM is indeed a continuous reduction in the fiscal deficit and therefore the government-borrowing programme will follow accordingly. You also have to remember that the State governments are also in the picture and now they have to borrow directly from the market as opposed to the Central government.

So I think one will have to watch this situation as we go along and we will have to long at the SLR issue dependent on both liquidity conditions, the micro economic conditions, the monetary conditions and also prudential aspects of what the SLR securities do in terms of the portfolio of assets that the banks have.

Q: Regarding inflation, we have seen the number crawl down just a tat bit in the past week and then the fuel price cut impact will also be seen in the current week. Is the RBI satisfied with this movement or do you think that it is a still a matter of grave concern and will require immediate steps?

A: We have given the kind of comfort levels in terms of the range of inflation that we will be comfortable with, as has the government. If you look at the implied GDP growth numbers in the Budget, it is somewhere between 13-14% in normal terms.

So assuming that the government is also assuming a growth rate of perhaps between 8.5% and 9%, that the implied inflation number is within that range and therefore presumably the issue of inflation management resulting in the inflation actually coming down to this kind of a range is very much in the minds of the government as well as ourselves.

We will indeed have to act as the situation demands, while keeping in mind the cumulative effect of all the monetary policy actions that we have taken and the supply management actions that the government has taken.