RBI fixes mid-term inflation rate at 5 pc

Mumbai, Apr 19: Reserve Bank of India (RBI) has fixed the mid-term ''self-imposed'' inflationary target rate at 5 per cent in view of the impending revision of domestic oil prices.

RBI Governor Dr Y V Reddy told mediapersons here today that while the headline inflation was lower than anticipated last year, ''no way we can allow it too high'' considering its impact on the core inflation rate, which is 1-1.5 per cent lower than the headline inflation.

The inflation in India needs to be aligned with global inflationary trend and thus, a pass through in domestic fuel prices is expected. ''Judiciously assuming the permanent factor of global fuel cost at USD 60 per barrel, a significant pass through in domestic prices is expected this year,'' Mr Reddy said.

On the political factors under consideration for not revising the interest rates in the annual monetary policy announcement yesterday, he said, RBI has considered all factors including the opinion of analysts.

''The economic cycle do not have much to do with political cycle...one has to take into account the financial market expectations in framing the monetary policy,'' he observed.

On cash reserve ratio (CRR), he said it has to be lowered over a medium term period, depending on the liquidity condition in the system. ''Liquidity needs to be consistent with monetary policy stance,'' he said.

As regards the diversification of funds from banking sector to capital market investment, the Governor said, such things happen with the diversification and integration of the overall financial markets and the risks of investment are spread over various financial intermediaries and market segments.

''We have to take a total view of the issue and not only restrict it to the monetary policy,'' he said.

Dr Reddy also observed that the fiscal deficit and Government borrowing programmes are within the reasonable limit, as the State Governments have improved their financial health considerably in the recent past.

UNI