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RBI vows to check inflation

Mumbai, Aug. 14: The Reserve Bank of India will take measured steps to contain inflation, which currently stands at 7.61 per cent, and does not expect the recent rise in bond yields to affect the government’s borrowing programme.

“We hope to continue to keep the extent of inflation lower than before. Price stability is also a key concern for the central bank as we have been maintaining in all the annual policy statements,” deputy governor Rakesh Mohan said.

“The average inflation in 1997 was 7 per cent and between 1997 and till now, it averaged 4 to 5 per cent. Today people get upset if it reaches a level of over 7 per cent. For almost 30 years, we had an average inflation of 7 per cent so this (people getting upset) is an encouraging sign,” he added.

He also asked the banks to step up their respective investment fluctuation reserves (IFR) and cautioned them against investing excessively in government securities.

Analysts said this statement by the RBI official comes in the backdrop of uncertainties in the interest rate scenario.

The annual turnover of the G-sec market is double the GDP of the country and probably the second largest in Asia after Japan, Mohan told reporters on the sidelines of a seminar.

Asked about the impact of rise in yields on the borrowing programme, he said, “We have had no difficulty till date and there is ample liquidity in the financial system.”

In a bid to quell depositors’ panic witnessed recently, the RBI deputy governor said the banking system in the country is sound and depositors should not panic.

Mohan’s statement came in the wake of Mumbai-based Maratha Mandir Cooperative Bank witnessing a run on its deposits. RBI yesterday directed that depositors of the bank can only withdraw up to Rs 5,000. Another bank in Mumbai — Punjab and Maharashtra Cooperative Bank — also saw panic withdrawals. However, RBI has said that the bank is well managed and there is no reason for depositors to panic.

The RBI deputy governor said the banking system is strong and “people are reacting to rumours”.

Referring to the Fiscal Responsibility Management Bill, which recommends bringing down the fiscal deficit to 3 per cent, Mohan said, “As deficit comes down, there will be no absolute reduction in net issuance of securities but the proportion will go down.”

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