Mumbai/ New Delhi: Indian inflation is unacceptably high and the Reserve Bank of India (RBI) is ready to act if needed but the situation is complex and needs careful consideration, the central bank chief said on Monday.
“We are in full readiness to take appropriate action if and when we make a judgement that any action is needed,” governor Y.V. Reddy told reporters after making a speech.
“Any decision to act has to carefully assess this extremely complex situation.”
Annual inflation as measured by wholesale prices hit a 14-month high of 6.68% in mid-March, largely driven by food and manufactured product prices, and economists expect it to remain high for a few months. It is now well above RBI’s 5% goal for the fiscal year which ended on Monday.
The central bank raised interest rates five times between June 2006 and March 2007 but has left its key lending rate on hold at 7.75% for a year.
Reddy said RBI had expected some price pressure at its last review in January.
“Our policy stance has taken note of these inflationary pressures. However, inflation has turned out to be more than anticipated, in fact much more than anticipated,” he said.
RBI was proactive in management of liquidity, he said, and gave it the highest priority. “There is quite a range of instruments to manage liquidity and we would not hesitate to use them. Liquidity management has to be consistent with overall monetary management,” he said.
On credit derivatives, there have been reports of dialogues between select banks and companies on the subject and the apex bank has also received communications from some corporates, he said.
The RBI had issued comprehensive guidelines on derivatives some time back. “As long as (these) guidelines are followed in letter and spirit, there is no cause of dispute,” Reddy said, adding that “as per our current assessment, the RBI does not anticipate any systemic problem (on account of derivatives).”
Meanwhile, the Institute of Chartered Accountants of India or Icai, on Monday reiterated that companies as also banks need to apply prudence while dealing with derivatives. Currently these are not fully being accounted for. Icai concluded in its last council meeting held between 27-29 March that these exposures may lead companies to face heavy losses as foreign exchange rates often fluctutate. “The council decided to clarify the best practice treatment to be followed for all derivatives,” said Ved Jain, president of Icai.
Jain clarified that Icai has issued accounting standard relating to financial instruments three months back. This includes accounting for derivation in Accounting Standard 30 or AS 30. But this standard will become recommendatory from 1 April 2009 and mandatory two years after that. “We normally give around two years time to companies to prepare themselves to adopt a new accounting standard but companies can follow AS 30 almost immediately,” added Jain.
Icai is of the view that companies or banks which have not yet adopted AS 30 should also report exposure in derivateive, at least losses occuring due to this exposure, by following the “principle of prudence” as given in Accounting Standard 1, which is mandatory. So Icai, which is also the regulator of accounting standards in India, feels that either way companies and banks should account for their exposure in derivatives. Reuters
Sangeeta Singh and PTI contributed to this story.