The Reserve Bank of India (RBI) said on Monday that it would continue to manage liquidity in the system to support growth, while warning that inflationary pressures were still ruling high and volatility in the foreign exchange market was a concern.

“The priority for monetary policy now is to restore stability in the currency market so that macro-financial conditions remain supportive for growth. This strategy will succeed only if reinforced by structural reforms to reduce the current account deficit (CAD), and step up savings and investment,” said the RBI in its Macro-economic and Monetary Developments of first quarter review.

The RBI said that food inflation rose in May and June 2013 and put pressures on general price-level. “These pressures could moderate somewhat if the monsoon remains on track during the rest of the season.” However, it said that recent currency depreciation and upward revisions in fuel prices had increased upside risks to wholesale and consumer price inflation.

Even though non-food manufactured products inflation declined sharply to its lowest level in the past three years, the consumer price index (CPI) inflation, however, had hovered around double digit-levels for the last 15 months, it said.

The RBI also warned that “indications are that CAD may have widened again” in the first quarter of the current fiscal 2013-14. CAD moderated to 3.8 per cent in the fourth quarter of 2012-13 from its historic high of 6.5 per cent in the third quarter of last fiscal. “Trade deficit has widened in the first quarter of 2013-14 on account of contraction in exports and sharp increase in gold imports,” said the apex bank.

While CAD is likely to fall in 2013-14 as the central bank has taken several measures to restrict import of gold, the RBI said that risks to CAD financing had increased with firming up of U.S. yields that caused global bond sell-off and capital outflows from emerging markets, including India.

On liquidity in the system, the RBI said that it “will endeavour to actively manage liquidity to reinforce monetary transmission that is consistent with the growth-inflation balance and macro-financial stability.”

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