For the next few quarters, we will be engaged in fighting inflation, Rajan said on the sidelines of the SBI banking and economics conclave. The governor said food prices have had an effect in the last couple of months and hoped that with appropriate food management, prices will come down. Both the government and RBI have to be vigilant on that, explained Rajan.
Rajan said RBI is also watching how the violence unfolds in Iraq and its impact on oil prices, adding India has enough foreign exchange reserves. Oil resources in Iraq are in the south, still not directly affected by the fighting. However, it is an issue we are watching, said Rajan.
Allaying fears of the Iraq situation affecting India, Rajan said that on external front, India is in a much-better position than last year. We have sufficient reserves; the current account deficit (CAD) is low and I think one should not worry so much about the external situation, added Rajan.
Even though the economy has had some relief in the form of inflation on the consumer price index (CPI) falling to 8.28% in May this year from a high of 8.59% in April, the wholesale price index touched a five-month high of 6.01% in May 2014.
In the June monetary policy, RBI had kept the repo rate and cash reserve ratio (CRR) at 8% and 4%, respectively, and said if inflation eases more than expected, there would be room for policy easing.
Ever since taking charge of the central bank in September last year, Rajan has been vocal on fighting inflation and has reiterated the target of bringing down CPI inflation to 8% by January 2015 and to 6% by January 2016.
In a note on Monday, Siddhartha Sanyal, the Chief India Economist, Barclays said, We expect subsequent WPI-based inflation releases to be substantially lower, with the rate likely at sub-5% levels in Q3 2014. We believe that food inflation, vegetables prices in particular, which led the spike in the headline WPI in late-2013, have largely normalised.