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RBI for using forex reserves to manage oil shock
June, 06th 2008

The Reserve Bank of India today said that it will use the foreign exchange reserves to manage the oil shock but hinted that it may not heed to the government's request to accord SLR (statutory liquidity ratio) status to oil bonds.

An SLR status will help oil marketing companies, reeling under financial distress due to under-recoveries, to make the oil bonds more attractive for purchase by banks. Banks have to mandatorily invest at least 25 per cent of their deposits in securities that enjoy SLR status.

While the petroleum ministry has repeatedly sought SLR status for oil bonds, RBI has refused to change its stance. Even on Wednesday, after the cabinet finalised a bailout package for OMCs, petroleum minister Murli Deora had raised the issue.

But RBI Governor Y V Reddy told reporters today that "RBI will maintain the integrity of the SLR regime".

He also said that the RBI is ready to take recourse to all conventional and unconventional steps like the special liquidity window for oil companies. Last week, RBI had opened a special window for OMCs to sell oil bonds worth up to Rs 1,000 crore everyday. In addition, oil companies have also been allowed to buy foreign exchange directly from designated banks.

"The pass-through of oil prices, which is of permanent character, is still incomplete. The government steps (initiated on Wednesday) is a very positive step," Reddy said.

He reiterated that the central bank will ensure orderly conditions in the financial markets. The governor also said that the turbulence in the international financial markets is less now and he does not expect the contagion to impact locally.

Earlier, in his convocation address at the Acharya NG Ranga Agricultural University, Reddy said the outlook for food prices in India is encouraging. The governor said that with signs of some reduction in global food prices, there is improvement in domestic supplies and buffer stocks and the food price situation in India is expected to improve in the next few months.

There is significant improvement in procurement of wheat. Though rice production stagnated since mid-90s, some turnaround is observed since 2005-06.

The prices of edible oil increased sharply in 2006-07 and spiked during 2007-08. However, some moderation has been observed during the current financial year so far, he said.

Reddy said that the global demand for the agricultural products will be very high for the next two or three decades and India will play a dominant role.

"The present global food situation is serious,'' he said. Though it is being argued that the rapid growth of China and India is putting pressure on the global demand, Reddy said, the enhanced demand could not explain the sudden spurt in prices in the last one year as both the countries had been growing at accelerated levels for over a decade.

The rise in food prices has been only a fraction of that observed in many other countries, he said citing the example of wheat and rice, whose prices have doubled in many countries but was only a tenth of that in India.

China has been a net wheat exporter and India was an exporter or an importer at the margin, he said. The drought condition in countries like Australia and Ukraine partly provide an explanation for the price rise. The restrictions by some countries on food exports too have enhanced the prices in some other countries.

Though it is being argued that increase in energy costs was resulting in cost push inflation, this might not explain the huge increase in food prices, the RBI Governor said. "The prices of corn and edible oils and biofuels have resulted in the prices of these commodities going up.'' Policies should be held responsible for this diversion (of food to fuel).

Reddy said food consumption in India will rise and the food basket will change.

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