Reining in inflation main task, says RBI

Capital inflows putting pressure on BoP

Reining in inflation main task, says RBI

“Inflation containment may have to receive precedence over other policy objectives in India,” said RBI in its annual report for the year ended June 30, 2010.  RBI has stated its commitment to containing inflation through its calibrated monetary policy normalisation, with clarity on the direction of the policy rates in the near-term as well as timely actions in cautious steps based on careful assessment of risks to both inflation and growth.
While the growth outlook for 2010-11 remains robust, inflation has emerged as a major concern and going forward, addressing structural constraints in several critical sectors is necessary to sustain growth and also contain supply side risks to inflation, said RBI.

 The apex bank, in its report, warned that volatile capital flows threatened to increase pressure on the country’s balance of payments (BoP), which is recording the widest current account deficit among large emerging economies.  India’s current account deficit has widened in the past year as fast-paced economic growth drives greater demand for imported goods, and is forecast to grow larger in the year ahead.

 It also said the country’s current account deficit had grown to 2.9 per cent in 2009-10 from 2.4 per cent in the previous year. One reason, the central bank said, for the deterioration in the balance of payments was a decline in an “invisibles surplus”, caused in part by falling revenues to India’s prized outsourcing sector.

 Even as the balance sheet of RBI was managed prudently, the asset and liability side developments reflected the result of operations of the bank undertaken during the year in pursuit of its broad macroeconomic and financial sector objectives.

On the liability side, there was a high growth in notes in circulation, banks’ deposits with the RBI due to the policy driven increases in CRR as well as deposit growth in the banking system and the Central Government’s deposits with the Reserve Bank. The outstanding balances maintained by the Central Government under the Market Stabilisation Scheme (MSS), however, declined.

On the asset side, there was significant increase in Bank’s portfolio of domestic assets in the form of government securities parked by the banks with the Reserve Bank for availing funds under repo. Foreign currency assets declined largely due to valuation effect and use of a part of such assets for purchase of gold from the IMF.

AT the same time, the gross income of the RBI for the year 2009-10 declined. As return on foreign assets tracked the near zero policy rates maintained by the central banks of the advanced economies, income on such assets declined significantly. In monetary operations, sustained period of large net absorption of liquidity through reverse repo also involved higher net interest outgo, it added.

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