Real interest rates reasonable: Rakesh Mohan

Reserve Bank of India deputy governor Rakesh Mohan on Tuesday said real interest rates were "very reasonable".

He reiterated that the bank rate was a medium-term policy rate, and therefore left unchanged, although the reverse repo and repo rates were raised by 25 basis points each.

"Bank rate... we have increasingly regarded as a medium-term rate signal. (What) we are really indicating is that our medium-term, long-term inflation, growth trends have not changed. So, the increase in the short term policy rate is basically a measure to make sure that we contain inflation," Mohan told television channels.

Earlier today, the central bank unveiled its mid-term review of 2005-06 (April-March) Annual policy. Mohan emphasised the need to keep a "sharp eye" on inflationary tendencies. "We don't know how oil price inflation will play out," he said.

Consumers are interested in headline inflation and not core inflation, he said. "There is a famous quote from Karl Otto Pohl (President of Germany's Bundes Bank) that inflation is like toothpaste...once you get it out of the tube, you can't get it back in. But, certain central banks have in fact put it back," Mohan said, adding, "we would like the tube not to be opened."

According to Mohan, healthy export growth meant that the country was absorbing imports much more.

Since core inflation is not going up, prices of most products are also not going up, he said. On the foreign exchange market, Mohan said, "The markets have been stable, smooth. The exchange rate has been market-determined for quite some time. We have a well-tested policy of letting the exchange rate be market-determined by forces of demand (and supply)."

"But, at the same time, we do not like nervousness, volatility in the market." Mohan added that the RBI would inject liquidity as and when necessary.