RBI alert on inflation, liquidity: Dy Governor

Inflation remains a concern for the economy and the central bank will do whatever it can to dampen it if it feels the measures recently taken were inadequate.

“A pause in rate hike doesn’t mean a halt. RBI has already taken measures to control inflation. If it feels they are not adequate, it will take more measures,” K C Chakrabarty, deputy governor of the Reserve Bank of India said here on the sidelines of a financial inclusion programme arranged by Corporation Bank in Mallaohalli village, around 50 km north of here.

Food inflation reached a 10-week-high figure of 14.44 per cent for the week ended December 18, on the back of high prices in items such as onion and milk.

This is the fifth continuous week in which food prices have seen an upward trend, hinting towards a possible liquidity sqeeze.

However, the banking system is already facing a liquidity crunch and recent measures such as reduction of banks’ Statutory Liquidity Ratio (SLR) has eased the situation to an extent.

Said Chakrabarty, “I don’t think liquidity is a problem. There are some frictional and structural issues but everybody is meeting their obligations despite that.”

He said RBI would look into the matter if the crunch persisted, despite banks giving higher deposits to their clients. “SLR should come down, to have more funds available for private sector. However, the reduction will depend on government borrowing,” he said.

On reduction in interest rates by micro finance institutions (MFIs), he said it would depend on the capability and cost structure of the institution concerned. “In a competitive environment, pricing comes out of competition. So, banks, regional rural banks and other financial institutions should participate in the financial inclusion space to make it competitive.”

He said the central bank would provide no interim relief in case of loan defaults to MFIs.

“We have no solution if people who are borrowing are not paying back. Institutions that are lending should make people credit-worthy, they should not exploit them and should not charge high interest. Proper due diligence should be done before lending,” he said.

MFIs are an important part of the financial inclusion process, as they bring people from money lenders to the banking system, he added.