Market-based forex rates can't be used to fight inflation: RBI governor
20 May 2008
Countries that allow exchange rates to be determined by markets cannot not then use the currency as a policy tool to fight inflation, Reserve Bank governor Y V Reddy has said.
"If the exchange rate is to be market-determined, you cannot use it as an instrument for some policy or the other," Reddy told a seminar in Singapore.
Reddy was responding to a question on why many countries were not using currency appreciation to rein in inflation.
Reddy said India's inflation rate, now at a 3-1/2-year high near eight per cent, will ease to 5.5 per cent by the end of the fiscal year in March 2009.
He, however, said the official data underestimates the actual rate of inflation.
India's wholesale price index rose an annual 7.83 per cent in the week ended May 3, its highest since November 2004, and economists say the actual rate may be closer to nine per cent due to sharp upward revisions in provisional readings recently.
"Yes, it underestimates the inflation number. There are underlying inflation pressures," Reddy said in response to a question on whether oil subsidies depress the actual inflation figure.
"The current high level of inflation is totally unacceptable, especially in terms of impact on inflationary expectations," he said.
Reddy's comments sent the benchmark 10-year bond yield two basis points higher to 7.97 per cent as traders expected more tightening measures to calm price pressures.
The RBI last tightened cash conditions on April 29 by announcing a 25 basis point increase in the cash reserve ratio for banks to 8.25 per cent.
Reddy said, as per the central bank's assessment, constraints on food supplies in the country should eventually ease.
"Our food analysis indicates some moderation of supply side constraints," Reddy said, adding that analysis was based on expectations of a good monsoon this year and improved wheat and sugar supplies.
