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RBI Chief Says Inflation Still A Concern

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Reserve Bank of India Governor Raghuram Rajan said on Wednesday that inflation was still a concern but added the deflationary global environment gave the central bank some elbow room with monetary policy.
"We still have concerns about inflation. Given the deflationary environment elsewhere, it's actually easier for us because we are not fighting inflation in an environment where inflation is picking up elsewhere," Rajan said in a conference call with analysts.
"So I think we are still in conventional monetary policy territory."
The comments come a day after the central bank held interest rates steady at 7.75 per cent, leaving its next move probably until after the government presents its annual budget at the end of this month.
Banking Sector
India's banking sector was not at risk of a crisis despite the bad loans impacting the sector, Rajan said in a TV interview, adding most problems were at state-run banks backed by the government.
"I don't think there's any risk of a crisis from the bad loans in the system, and there is a reason for it, which is bad loans are primarily in the public sector system, which means that the full faith and credit of the government is behind that," Rajan told Bloomberg TV in an interview on Wednesday.
"So, it is not going to take down the banks," he added. "Nobody should be worried about it: banks are safe."
On Tuesday, Rajan said though the country may get affected by the spillover effects of the loose monetary policies in advanced economies, the economy is well prepared to cope with it.
"Will we be immune to volatility? The answer is no. Everyone is affected by volatility (but) we are in a much better position. But after the first wave of volatility when market participants stop to think, I am hopeful that we will look much better than perhaps competitive countries," Rajan told reporters.
Late last month the ECB had announced a fresh $1.1 billion bond buying programme even as it kept its interest rates at near zero levels. Similarly, the Swiss central bank had for the first time lifted the 4 per cent cap on franc against the euro, and the Japanese central bank is pumping trillions of yens into the market.
Rajan said the country's high foreign exchange reserves, which crossed $322 billion for the first time in the past reporting week, will provide a cushion.
In its sixth bi-monthly monetary policy review, RBI said, "Financial markets remain vulnerable to uncertainty surrounding monetary policy normalisation in advanced economies and a possibly weaker growth in China and oil exporting emerging market economies."
Rajan said the country has made important strides in a few macroeconomic variables like growth, current account deficit, inflation and fiscal deficit.
"Our growth has not plunged as low as some of our comparative countries; the current account deficit has improved, inflation has come down, which is one of the reasons for the stability of the rupee," the governor added.
When asked has the market priced in the coming tightening rate cycle of the US Federal Reserve, Rajan said, "I am not sure that we know fully the process the Fed will follow."

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