More durable strategy for mitigating mismatches is to step up efforts to mobilise deposits

Reserve Bank of India Governor Raghuram Rajan, dubbed an inflation hawk by his critics, on Tuesday, ruled out a blind fight against inflation, saying a single-minded focus on price rises, regardless of its consequences on growth, is not the remit of any “reasonable central bank.’’

“I don’t want to say in any way that the RBI is going to become nutters on inflation,” said Dr. Rajan in his customary post-policy media interaction here.

Ruling out inflation targeting in the strict sense of the word, Dr. Rajan said the domestic context did not allow him to single-mindedly focus on inflation as growth was also a concern.

“For any reasonable central bank, while looking at achieving reasonable level of inflation, it also has to take into account the growth situation, because growth itself will create some dis-inflationary forces and, therefore, it means you can achieve the inflation target less of an interest rate hike,” he said.

Since assuming office on September 4, Dr. Rajan has hiked the key repo rate by 25 basis points each on September 20 and on October 29, taking the short-term lending rates to 7.75 per cent.

Our Mumbai Correspondent adds:

While saying that the RBI would provide liquidity in the system for productive purposes, the Governor said “the more durable strategy for mitigating mismatches between the supply of, and demand for, funds is for banks to step up efforts to mobilise deposits.”

RBI Governor said that unwinding of exceptional measures introduced in the wake of volatility in the foreign exchange markets — like increase of MSF by 300 basis points on July 15 over and above the repo rate — “the process of re-aligning the interest rate corridor to normal monetary policy operations is now complete.”

Dr. Rajan had assured that the difference between the repo rate and MSF would be brought down to 100 basis points, in his maiden policy announcement in September after taking over as RBI Governor, while bringing down the MSF from the increased level of 10.25 per cent to 9.50 per cent.

He said that the central bank considered Wholesale Price Index (WPI) inflation and the Consumer Price Index (CPI) inflation while taking a decision on inflationary pressures and expectations. “The RBI looks at both WPI and CPI..…..We cannot neglect CPI…..WPI misses some aspect of inflation… CPI is something that common man experiences.”

WPI inflation is expected to remain higher than current levels through most of the remaining part of the year, warranting an appropriate policy response. “Retail inflation measures by the CPI, has also risen sharply across food and non-food constituents, including services, keeping inflation expectations high. Notwithstanding the expected edging down of food inflation, retail inflation is likely to remain around or even above 9 per cent in the months ahead, absent policy action.”

On growth, Dr. Rajan said that there was big uncertainty. “The industrial activity has weakened with a contraction in consumer durables and tepid growth in capital goods reflecting the ongoing downturn in both consumption and investment demand”.

However he said that strengthening export growth and signs of revival in some services along with expected pick-up in agriculture could support an increase in growth in the second-half of 2013-14 relative to the first half. “We will get fairly strong agricultural growth…. this will improve the rural sentiment and demand.”

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