Upside risks to inflation, downside to growth persist: RBI

Q: You said at one point in liquidity discussion that, should the situation change appropriate and proactive steps will be taken to restore comfort. Should we understand that liquidity intervention is going to be spread out and we should expect Open Market Operations (OMOs) every time we see the comfort zone getting disturbed?

A: The NDS-OM is really a very small window. It does not offer the capacity to address the stresses we have seen; it is a small compliment to a more structured OMO process.

The way we are looking at pro-activity, we work on forecast of liquidity with a four week or a few week horizon. In that framework we predict to some degree whether pressure will build up or not. If it builds then we are a little forewarned we can decide on what action we are going to take without getting into the situation before we actually get into a situation.

The fact that we have some capacity to anticipate liquidity conditions a few weeks ahead gives us enough leeway to be able to either act to prevent it from happening or to react quite quickly to it.

Q: Nearly, over Rs 1 lakh crore leaks out of the banking system, the currency with the public. When you say pro-active do you mean that RBI knows that money has to be replaced in the banking system. Will OMO’s be spread out throughout the year because this money has to be replaced?

A: I wouldn’t be so specific. The notion of pro-activity is that, to the extent that we can anticipate pressure building up that we can either take steps to prevent it or we can respond very quickly to it.