Whatever causes it... whether it is political or global developments...the rupees depreciation does contribute to inflation, particularly through its impact on unavoidable imports like oil, he said.
While rupee rose for six times in seven days and strengthened by 5 paise in early trade on Friday to touch one-month high of 54.09 against dollar, it had fell to an 11-week low in November. While oil and gold imports continued to push it lower, continuous selling by exporters and banks limited its fall. Gokarn said the central bank will use all available means to check any volatility in the rupee.
Liquidity deficit in the banking system is within the comfort zone and the regulator will take more steps, if required, Gokarn said at a seminar organised at CII-Suresh Neotia Centre of Excellence. An OMO (open market operation) gives us the flexibility to respond in very short order to stresses, he said.
So, if we see them remaining in the system, then obviously we have the capacity to respond to them, he added. The liquidity in the banking system stayed constrained due to higher government borrowing and festive season withdrawal from banks. The central bank decided to conduct open market operations of R12,000 crore on Tuesday based on the assessment of current liquidity situation.
Commenting on the FDI in retail, Gokarn said that it could help contain inflation in the long run.
We have both a productivity issue and a distribution issue on food prices. So, anything that will help improve productivity and help reduce distribution costs is something that will contribute to long-term inflation management, Gokarn said.