RBI watching inflation, Iraq developments closely: Rajan

Reserve Bank chief says country better prepared to fight external shocks

While the tension in Iraq is an area of concern, as a rise in international crude oil prices could stroke inflation, the country is well-prepared to absorb any external shocks, Reserve Bank of India Governor Raghuram Rajan said on Tuesday.

“I think the Iraq issue is an area of uncertainty, as we know that the oil resources are in the south still not directly affected by the fighting; but it is an issue that we are watching. We should be concerned about the fighting in the area,” Rajan said on the sidelines of State Bank of India's Banking and Economic Conclave.

According to him, the country's foreign exchange reserves have grown, as the current account deficit was on the decline. "As far as the external front goes, we are in a much better position than we were last year. We have sufficient reserves; the current account deficit is low. One should not worry too much about the external side," Rajan said.

Foreign exchange reserves rose to $314 billion as of May 9, the highest since November 2011, as the central bank bolstered its ability to defend the rupee, before falling to $313 billion as of June 6.

After Islamic militants took control of areas in northern Iraq, oil prices have gone up, impacting prices domestically. The country imports more than 70 per cent of its crude oil requirements.

The late onset of this year's monsoon and forecasts of below-average rainfall have stroked inflation fears. After increasing policy rates by a total of 75 bps since September to eight per cent, the central bank left the rates unchanged in the last two monetary policy meetings.

The US Fed has also warned that it would scale back its monetary stimulus, which could hit the rupee.

The governor, however, had a word of caution on the inflation front.

"We are watching inflation. Food prices had an effect in the last couple of months and our hope is that with appropriate food management, some of these prices will come down. We have to wait and watch, though the government and RBI have vigilant on this," he said.

The central bank targets consumer price inflation, which was at 8.28 per cent in May, a level which is above its medium-term target. RBI had prepared a road map to bring down retail inflation to eight per cent by January 2015 and to six per cent by January 2016.