Mumbai: RBI Deputy Governor Subir Gokarn Tuesday said the appreciation of the rupee and softening of commodity prices will give the central bank more leg-room to ease the monetary regime going forward.
"If commodity prices and rupee appreciation continue we will be more comfortable. This also increases the space for us to reduce rates," Gokarn, incharge of the monetary policy department at the Reserve Bank, said at a function at St Xavier's College here.
Earlier in the day, the apex bank left all the key policy rates unchanged but hinted that it will start the easing process by the end of the next month, when it will announce the third quarter monetary policy.
On the surprise decision to leave the CRR unchanged at a time when the liquidity squeeze has been too tight -- with banks' borrowing from the overnight counter crossing a Rs 1 trillion daily -- Gokarn said the current high borrowing is the result of large cash balance with the government and the advance tax payout.
He assured however that RBI will not let the liquidity condition go out of hand, and said if there is a need to do more OMOs it will be done.
Since the beginning of this month, RBI had done two Open Market Operations of Rs 12,000 crore each.
On the mid-quarter review, Gokarn said the guidance was based on RBI projection that "inflation would go up in near- term. Though the latest inflation numbers are below our projection, we still think there may be some rise in inflation in the near-term as there are differences between headline (WPI) and consumer (CPI) inflation", he said.
"We have been seeing some divergences between CPI (Consumer Price Index) and WPI (Wholesale Price Index). However, essentially inflation trend is moving downwards though different set of numbers are giving different directions and that risks to inflation still persists," Gokarn said.
On the government measures aimed at fiscal correction, he said the diesel subsidy cut and FDI policy are pointing to increase in investment climate.
On the steeply falling growth numbers, Gokarn said, "Recent reforms and RBI measures in future will bring some economic recovery. Good to see some recovery process starting, (in regard to October IIP)."
Later, Gokarn told reporters that going forward, supporting growth will be the priority of the central bank, given the continued softening of the inflationary expectations and the commodity prices.
"After April's repo cut, we have been watching and reacting to the way inflation is panning out. And now we are seeing the trajectory has started going down and that gives some visibility of moving towards growth side. That is the guidance we gave in the October policy and is reinforced in today's review," Gokarn said.
He was talking to the press on the sidelines of a panel discussion on 'Policy Roundtable: Macroeconomic and financial policy challenges 2012' at the Emerging Markets Finance Conference.