Ahead of the monetary policy review on May 3, Reserve Bank of India (RBI) Deputy Governor Shyamala Gopinath said inflation was a concern, mainly on account of the high prices of non-food manufacturing goods.
Against RBI's projection of 8 per cent inflation for March, Wholesale Price Index (WPI) inflation stood at 8.98 per cent, also higher than the inflation figures in February (8.31 per cent).
"Inflation is a concern for us, and RBI has been articulate on an anti-inflationary stance. We are concerned with inflation and underlying inflationary pressure, which is because of non-food manufacturing inflation," Gopinath said on the sidelines of an RBI workshop on the Foreign Exchange Management Act.
The high inflation in March resulted from high fuel and manufacturing prices, with the fuel price index rising 12.92 per cent from 11.49 per cent in February, and manufacturing inflation at 6.21 per cent, compared with 4.94 per cent in the previous month. Manufactured items have the highest weight of 64.9 per cent, in the WPI.
"Non-food manufacturing contributed 39 per cent inflation in March, compared with 36 per cent in the previous month. These are trends seen in markets where there are demand-supply mismatches," Gopinath said.
RBI had raised key rates eight times since March 2010 to tame inflation. Last month, RBI had raised the repo rate (at which banks borrow from RBI) from 6.50 per cent to 6.75 per cent.
It also raised the reverse repo rate (at which banks park their short-term excess liquidity with RBI) from 5.50 per cent to 5.75 per cent.
"We will evaluate the underlying inflationary pressure in the monetary policy. One must know that it acts at a lag and it takes 12-18 months to see the mechanism work. One does it in a calibrated fashion, so as not to create much market disruption," Gopinath said.
She also said high commodity prices and capital inflows were other reasons for inflation. There was no mathematical relation established between higher interest rates and capital inflows.
Brent crude oil fell $1 a barrel on Monday to below $123 on concerns that high prices were hurting demand.
Corporate bond limit
"We have substantially liberalised corporate bond and infrastructure bond limits. There is no real need to review the limit," she said.
In 2010, the government had raised the limit of investment by foreign institutional investors (FIIs) in the debt market by $5 billion, both for government as well as corporate bonds.
"In FII debts, we are restrictive, as there could be some real vulnerability from short term debt...We try to maintain macro stability through a differential mechanism, including interest rate, FII investment and control of debt," she said.
On raising the institutional investment limit, Gopinath said, "Right now, there is not much interest in that route, but depending on the need, we can review it any time."
Capital account convertibility
Currently, the rupee is fully convertible on the current account, but partially convertible on the capital account, on fears of a sudden outflow of capital.
"Capital account convertibility is a process, not an event. We keep liberalising our regulations based on the needs of the industry and the corporates. We have substantially liberalised our regulations. Something more can be done based on circumstances," she said.
Further liberalisation of the capital account would also take into account factors like inflation and interest rate differential, she said.
RBI had earlier appointed a Committee on Capital Account Convertibility, with S S Tarapore, former RBI deputy governor as the chairman.
The committee, in its report, had recommended the introduction of capital account convertibility in three phases.
SBI home loans
On SBI's appeal to waive the additional provision requirement for its special home loans, Gopinath said, "SBI had requested us, but rules apply to all banks. We cannot make exemptions for a single bank."
She said there was a large expansion of credit at SBI on account of housing loans.
In November, RBI had proposed raising the provisioning for teaser loans. The central bank had raised provisioning from 0.4 per cent to two per cent for dual rate schemes.
