With the Iraq crisis threatening to spur oil prices higher and push inflation up, the Reserve Bank today said the country has enough foreign exchange reserves and is better prepared to deal with any fallout.
“As far as the external front goes, we are in much better position than we were last year. We have sufficient reserves. The CAD is low. And I think one should not worry too much on external environment front,” RBI Governor Raghuram Rajan said.
He was responding to queries on the impact of the Iraq crisis, which has affected global crude oil prices and the rupee, on the country’s economy. He spoke on the sidelines of an SBI function here.
The Iraq crisis has erupted when the new government is gearing up to formulate its first Budget amid a slowing economy and high inflation, particularly in the food segment.
Rajan said that since oil resources are in the south of Iraq, the infighting there has not directly affected the oil business.
“The issue in Iraq is still an area of uncertainty. It is an issue that we are watching, and of course all should be concerned with the fighting in Iraq,” he added.
He said that with the narrowing of the current account deficit (CAD) and strong forex reserves, the country’s external situation remains less worrisome.
On inflation, Rajan said the central bank was closely watching the situation and expressed hope that proper food management will help to ease prices.
“We are watching the inflation situation. Food prices have had an effect in the last couple of months,” he said, adding that food prices may come down with appropriate food management by the government.
Headline inflation accelerated to a five-month high of 6.01 per cent in May from 5.2 per cent in the previous month, driven by high food and fuel inflation.
“But both the government and the RBI are watching and have to be vigilant in this,” Rajan said.