The Reserve Bank of India on Wednesday said it is vigilant to the possibility of overheating in the economy and will do everything to prevent such an occurrence.
"We are alert to the possibility of overheating (which is persistent high inflation due to supply shortages) and we will do everything possible to prevent that," RBI Governor Duvvuri Subbarao told analysts on Wednesday.
The governor said the approach to prevent overheating in the economy is to act on the supply side. "Our approach to preventing overheating is to act from the supply side," Subbarao added.
Rising headline inflation numbers are typically one of the first signs of overheating in the economy. As a result, governments and central banks usually raise interest rates to curtail spending and borrowing.
Yesterday, the central bank moderately raised its key short-term rates as also the mandatory cash reserves that banks maintain with it by 25 basis points each to tame inflation.
Even though inflation drew closer to 10 per cent in March, analysts rule out an immediate danger of overheating as surging prices are not spread over and supply of food items are being augmented.
Deputy governor Subir Gokarn said the apex bank has three challenges this year -- supporting growth, containing inflation and managing government borrowings without hurting the private sector needs.
"We want to sustain the recovery process. We want to give it as much support as possible. At the same time, we do not want an accelerating growth rate to start putting inflationary pressures in the system. Also, we do have a government borrowing programme which cannot be allowed to disrupt financial markets," Gokarn said.
As such, the central bank went in for a moderate hike of 25 basis points in its key rates and cash kept by banks with the central bank in its annual Monetary Policy announced on Tuesday. "So, to strike a kind of balance between these three broad objectives, we came to the conclusion that a moderate action on the rates and liquidity provides us the best prospect of meeting all these obligations," Gokarn said.
The government has projected its market borrowings for this fiscal at Rs 4.57 lakh crore (Rs 4.57 trillion) against Rs 4.51 lakh crore (Rs 4.51 trillion) last fiscal and it is planning to mop up 63 per cent of this in the first half itself.
Gokarn further said there is a possibility of high capital inflows posing problems, but that has not arisen so far. "Let's wait to see whether the trend is firming up before we act," Gokarn said.
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