US-Iraq War Poses No Concern For Reserves: Rakesh Mohan

Mumbai, January 30: | Updated: Jan 31 2003, 05:30am hrs
Reserve Bank of Indias (RBI) deputy governor Rakesh Mohan on Thursday said a war threat by the US on Iraq is not a major concern for Indias foreign exchange reserves, and its impact on inflation will be limited.

Obviously, it (war) will have some impact, particularly on the markets worldwide and forex. But given the level of reserves (in excess of $72 billion) it is not a major issue, Dr Mohan told reporters on the sidelines of an annual conference on Money and Finance in indian Economy organised by the Indira Gandhi Institute of Development Research (IGIDR).

The subject of forex reserves is a very active issue and in recent weeks, there has been a debate over the cost of holding such reserves and interest rate differentials (between the US and India) causing arbitrage opportunities, Dr Mohan said, adding, The RBI is studying the issue of carrying costs of huge forex reserves, and we will come out with the results by the end of this week.

Referring to the impact of a warif at all it happenson inflation, Dr Mohan said it would depend on oil prices but nobody knows where they will go. He added, Given that the price rise to $30 a barrel from $20 during the last one-and-a-half years did not have much impact on inflation, it will not affect inflation much.

The Indian economy has the resilience as it has withstood both increased oil prices and drought, because of the high level of forex reserves and ample foodstock.

Perhaps, this question about some 18 months back would have made us think with some caution, Dr Mohan added. On the proposed repayment of multilateral loans worth $2.8 billion, the RBI deputy governor said that the government would privately place bonds with the RBI, for making the payment, so that the market will not be affected by that much of bonds entering the market at a time.

Referring to state governments raising bonds for the debt-swap arrangement, Dr Mohan said, The finance ministry has to decide on the amount. Whether it will be effected in the fiscal 2003 is for the government to decide.

Ruling out an immediate repos rate cut, Dr Mohan said the RBI was keeping a close watch on liquidity movements and was neither comfortable nor uncomfortable with it as also is the case with (rise in) bond yields.