Kolkata: Reserve Bank of India (RBI) Governor Y V Reddy today (Dec 16, 2004) said the bank would use all its instruments to manage liquidity in the system following increased FII inflow.

"We will continue to use all the instruments that we are currently using from time to time to manage liquidity," Reddy told reporters after a meeting of the Central Board of the RBI in Kolkata.

Commenting on the concerns expressed by the Union Finance Minister P Chidambaram on liquidity management, the RBI Governor said, "No. It is not right that he has raised concerns. I think he recognised the challenge and I believe that he is happy that we are managing the challenge responsibly."

The fact remains that a strong FII inflow also involved to a certain extent a greater challenge or additional challenge to the liquidity management, he said.

He said liquidity unwinding was being planned earlier and now its amount may be more than what was anticipated.

"I think we have enough tools. We have got a range of tools apart from significant experience in managing liquidity and we are very confident that we will be able to manage it with the type of capital flows that is happening," Reddy said.

He said it were only the operational tools used that were the core of liquidity management and not the measures.

"It is not measures, but it is using the various instruments that we have in managing the liquidity that is important."

Asked whether the inflation rate was a cause of concern, Reddy said, "The board reviewed the whole macro economic situation and felt that the GDP growth will certainly be in the range we had expected i.e. 6 to 6.5 per cent and growth of manufacturing industry in particular is a matter of great satisfaction."

Commenting on oil price and its impact on inflation, the Governor said, "While oil prices has come down, but again it is a bit of yo-yo kind of situation. Our own estimate is that while currently inflation rate is short of seven per cent plus, over a period it should slowly drop and we are hoping that the year will end at what we had expected in the monetary policy at around 6.5 per cent."

Reddy said the monetary policy actions taken in the last few months have had the impact on financial market and the credit market broadly on the way the bank had intended to be.

"The monetary policy stance that has been taken continues to be valid and we will stick to the measures already announced," he said.

To a question, Reddy said Fed rate increase has been discounted in some way or already taken into account in the various financial markets.

"We also see the impact on the market has not been dramatic because it was anticipated and it has been absorbed in the way it should have been and in some extent in the line in which we had captured in the monetary policy, but we do continue to keep a watch," he said.