MUMBAI(Reuters) – India’s central bank will take all possible monetary measures to maintain price stability with its focus remaining on surplus cash management to curb inflation, deputy governor Rakesh Mohan said on Wednesday.
Mohan said he saw no contradiction in the central bank’s policy of buying dollars for rupees to keep the local currency from rising while absorbing excess cash from the banking system.
“Maintenance of macroeconomic stability and financial stability is important to us,” Mohan told an investor seminar.
“We will take all possible monetary actions to maintain price stability and will respond swiftly to bring inflation down.”
Indranil Pan, chief economist at Kotak Mahindra Bank, said inflation concerns remained as there was an overhang of cash in the system, reflected in low overnight rates.
“Monetary tightening is likely to continue via liquidity squeeze through stabilisation bond issuances,” Pan said.
The central bank next reviews monetary policy on April 24.
The yield on the 10-year federal bond rose briefly to 8.01 percent after Mohan’s comments, compared with Tuesday’s close of 7.97 percent. It was up 1 basis point on the day at 0900 GMT.
Inflation, as measured by wholesale prices, touched its highest in more than two years at 6.73 percent in early February. It has since slowed to an annual pace of 6.1 percent but is still well above the central bank’s projection of 5.0-5.5 percent.
Mohan said a reasonable amount of sterilisation of surplus cash was needed to achieve desired monetary growth.
Sterilisation refers to the central bank draining rupees from the banking system that partly resulted from its intervention to curb the local currency’s strength.
“Everything is totally consistent with our monetary policy stance. There is an overall view that we have to maintain price stability and bring inflation down. Therefore we have acted on all fronts,” he said.
The central bank has recently stepped up the pace of monetary tightening, which began more than two years ago, with particular emphasis on draining excess cash for fear it will fuel inflation.
Asia’s fourth-largest economy is estimated to grow 9.2 percent this year, its fastest pace in 18 years, and Mohan said its buoyancy has induced tremendous growth in capital flow.
Credit is expanding at 30 percent a year and money supply at 20 percent. Since mid-December, the central bank has raised the reserve requirement for banks twice and resumed sales of market stabilisation scheme bonds, after a gap of more than 18 months.
“With this kind of buoyant growth and expectations of growth, the flow of capital has increased tremendously and therefore there has to be a reasonable degree of sterilization in order to maintain the monetary growth that we would like to have,” Mohan said.
Data this week showed the central bank bought nearly $8 billion in the three months ended January.
Mohan said the country has been gradually opening the capital account and moving towards a market-determined exchange rate system with a reasonable amount of flexibility.
“We have gained tremendously from the currency policy with continued increase in exports, service exports, imports and foreign direct investment and so on,” he said.
A panel on currency reform has recommended India move towards a fuller float for the rupee in three phases ending in the fiscal year 2010/11.