The high vegetable price inflation cut into people's budget and they didn't have money to spend on other things. So this notion that inflation is irrelevant to demand and somehow we can have strong demand without bringing down inflation needs to be revisited.
ON DEMAND
This notion that inflation is irrelevant to demand needs to be revisited. We don't have magic levers. We have to work at it. We think with what we have done so far as well as the relative weak state of the economy plus the fact that we will see some effect of the stabilisation of the exchange rate, we have confidence we can bring inflation to more tolerable limits within the course of the year.
If we can do that (bring inflation down), that will give us some room on the monetary front, which can then be passed through. But first let's fight the fight that needs to be fought.
ON THE FISCAL POSITION
Given the government fiscal road map, I don't think we should say monetary goals are unattainable. I think they are perfectly consistent with the government fiscal road map and if the government adheres to that road map, I don't see why we cannot bring down inflation over a period of time.
There is no decision on whether 4% will be the target, and remember, it is 4% plus or minus 2%. But at this point, we are just taking up that we need a disinflationary process, and reaching 6% by 2016, given the government's fiscal framework, seems eminently feasible.
ON CURRENCY
We have enough in reserves. We have enough in capacity to sustain. But going forward, I take heart from the fact that our long-term flows have remained stable even during the most extreme volatility last year. So my sense is that we are in a very different position from last time. Of course we will remain very vigilant and do what is necessary as and when it becomes necessary.
ON LIQUIDITY
Our movement will be towards reducing the banks' need to borrow individually from special windows on a daily basis, and moving towards supplying market-wide liquidity needs through auctions via various repos — overnight repos, term repos, etc.
We are trying to bring down the interest rate for liquidity down to the policy rate but instead of liquidity being freely available from that window, we are trying to make it a more market-driven process. That is the direction we are slowly moving towards.
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