In a major shift in policy preparation, the Reserve Bank of India (RBI), on Tuesday, focussed more on retail inflation, known as consumer price index (CPI) inflation, rather than its traditional stress on wholesale price index (WPI) inflation. “Clearly, we have made a lot of noise on the CPI inflation for sometime, and the RBI has always focussed on WPI and CPI. But given the fact that CPI has stayed high for a considerable amount of time and considering the retail investors as well as the consumers, we have to bring it down,” said Raghuram Rajan, RBI Governor,at a press conference here.
The Urjit Patel committee report had given a timeframe, which “seems reasonable by which we can bring down the CPI to what is reasonable,” Dr. Rajan added. The panel has indicated a ‘glide path’ for disinflation that sets an objective of below 8 per cent CPI inflation by January 2015 and below 6 per cent by January 2016.
“The primary focus is not the investor, not the market, it is the Indian consumer, that how do we bring inflation down so that their welfare can improve,” Dr. Rajan added. He said that over the ensuing 12-month horizon, and with an unchanged policy stance, there were upside risks to the central forecast of 8 per cent. Accordingly, “an increase in the policy rate by 25 basis points is needed to set the economy securely on the recommended disinflationary path.”
Overtime, said Dr. Rajan, “we have to figure out how we make the CPI index better…but the fact is that it is not perfect… it is too high, and we have to bring it down.” However, he said that some of the suggestions required the government and the RBI to come on board. So, as and when “we proceed on the recommendations, we will have to have a dialogue with the government.”
“The report has recommended flexible medium-term inflation target. We will take a close look at it, and take up what we need to. It is premature to say we have moved (the policy) towards inflation targeting. There can be no question, and time and again we have said that we need to bring inflation down.”
“Based on our models, when we factor in this rate hike, we should be able to reach the 8 per cent objective by the end of the year. Core (inflation) tells us something about the second round effects. We look at all components… like some aspects of services like, say, education, have been growing up strongly. So, the important point here is that inflation is not really food inflation but more than that,” Dr. Rajan added.
“If we cut rates, for example, do you think banks would have cut their deposit rates?” Dr. Rajan asked. “The deposit rate is high because inflation is high. The customer wants a real rate of return. If RBI cut policy rates, it is not going to create an immediate reduction in the banks’ cost of funds nor a filter through into the borrowers’ cost of funds and not going to create immediate demand,’’ he said.
Cut in people’s budget
“The high vegetable prices cut into people’s budget and they didn’t have money to spend on other things...We have no magic, we have to work at it. We think that what we have done so far, given the relative weak state of the economy plus the fact that we will see some effects of stabilising of the currency, we have confidence that we can bring inflation to tolerable limits over the course of the year and that can give us some room on the monetary front which can then be fought too. But first let’s fight the fight that needs to be fought,’’ he said. As far as growth is concerned, he said “we are waiting for the government steps to play out, and they will all add up together to aid stronger growth and wait for appropriate action in the coming quarters.”
A vigilant owl
The Reserve Bank brass took to ornithology to explain its policy stance and its intents as it took everyone by surprise with a rate hike on Tuesday.
“We are neither hawks, nor doves. We are actually owls,” Governor Raghuram Rajan said, eliciting loud laughter at the customary post-policy press conference here.
He was answering a question on the self-contradiction in the RBI’s third quarter monetary policy, which is hawkish in its stance as it unexpectedly raised rates, but dovish in its guidance because of indications of a pause.
“An owl is traditionally a symbol of wisdom. So, we are neither doves (nor hawks)...but owls, and we are vigilant when others are resting,” Deputy Governor in-charge of Monetary Policy Urijit Patel elaborated.
“The broad point is that don’t try and put us into buckets. We are doing what is necessary for the economy,” Dr. Rajan chipped in again.
He cited the last policy’s experience as a case, saying it was decided to hold on because of the RBI’s focus on being vigilant.
“I think the last time we wanted to say we were vigilant but waiting for more data flows. That meant we didn’t act but we wanted to convey the signal that we were ready to act,” he said.
The RBI would have more room to cut interest rates, and might also advance the rate cuts if the inflation cooled faster than expected.