RBI keeps open market operations (OMO) open in case of liquidity crunch

Chennai:

 Reserve Bank of India is open to more OMO (Open Market Operations) option in case of further liquidity problem and the interest rate cuts will depend on sustained downward movement of inflation, according to Reserve Bank of India Deputy Governor Subir Gokarn.

Speaking to reporters after delivering The 5^th SAGE-MSE Endowment Lecture on India’s Non-Inflationary Rate of Growth: Analytical Prespectives and Policy Implication at the Madras School of Economics here on Monday, Gokarn said the Central Bank is observing the market response after the recent cash reserve ratio (CRR) cuts and if there is a need to address liquidity, RBI is keeping the OMO option open.

“We will have to observe the response of the market over the period of time. The CRR cut was, in a purely liquidity sense, the equivalent of about three OMOs which roughly put together is some Rs 32,000 crore. If there is a persistent shortage then certainly we are keeping the OMO option open,” he said.

     

Commenting on the interest rates especially in the present inflation pattern, he said, “There is no short term fix. But if there is spike in inflation in few months down the road, then it has not accomplished anything.”

“We need to look at inflation management not for a month or two, but on a sustained basis, it has to come down and stay down at least below certain thresholds for some period of time for it to start impacting positively on investment behaviour in particular,” he said.

Gokarn also said the recent rupee appreciation will dilute some of the inflation pressure adding that the Central Bank has taken some measures in November and December to stabilize the rupee. “After December 15, the rupee has stabilized significantly,” he said. “In January there has been a general reversal of capital that started to flow in emerging economies. It is partly the result of liquidity that is having a similar effect on the emerging economies currencies. Gokarn added that the exchange rate will broadly depend on global liquidity and developments in Europe.

To a query on criticism of RBI policies on its failure to tame inflation, Gokarn said the criticism are two-ways and the Central Bank has made judgements that are based on assessment of both growth and inflation. “We have found some sort of a middle ground between these two extremes.”

He said although the food inflation has remain low but there is a strong demand driven pressure on protein prices because of people shifting their dietary habits and dietary patterns. There is much more demand for products like milk, meat and eggs and so on,” he said.

He said the programme like National Mission for Protein Supplements announced during the budget has to deliver in productivity to bring down the food inflation.

 Commenting on Mahatma Gandhi National Rural Employment Guarantee Act (NERGA) impact on the cost of agricultural production, he said, the behaviour of rural wages in the last two years, the average increase has been substantially more than might have been projected on the basis of NREGA floor. That may be contributing. But, there are other things that are driving wages up which include skill mismatch besides the increase in the cost of agricultural production.

The solution lies in more supplies, better productivity of food products and more people being trained and equipped to meet market requirements,” he said.