A continuing plunge in crude oil and other commodity prices in global markets offers one of the best and the lowest-cost means to choke the inflation fangs sustainably and India must take advantage of this scenario, RBI Governor Raghuram Rajan said on Tuesday.
“We must take advantages of these propitious circumstances (of lower crude and global commodity prices) once and for all to get inflation down. If we can’t get it down now and say ‘Look, we will try again later’, I am not sure we will get better circumstances. And we can do it relatively low-cost now,” Rajan told analysts in the customary post-policy conference call this afternoon.
Calling for more efficient supply side management, the RBI chief further said such a measure along with lower crude and commodity prices, more supply side steps must kick in more strongly to reduce the bottlenecks and reduce the pressure on inflation.
“Hopefully, over the next year and-a-half, we will see some of the measures that have been taken so far come in more strongly,” Rajan said.
In these disinflationary episodes, eventually expectations of the public get more anchored and then work their way into variety of places including wages and so on, he added.
Rajan said he is not trying a Volckerian disinflation method as interest rates haven’t gone higher than 8 per cent.
“If we can bring down inflation sustainably with only a mild cost to output, I think we would have created a very important change in the economy,” the Governor said.
On the steep fall in crude prices since the Iran nuclear deal, Rajan admitted that RBI has not taken into consideration the full impact of this in its models which has oil price in the mid USD 50-levels.
“So if oil stays significantly below that, it would be a very positive factor.”
Crude is trading at USD 47-49 a barrel while the 2018 WTI crude futures are quoting USD 49 a barrel indicating that oil prices will not move up too fast in medium term.
Justifying the staggered steps to attain disinflation, Rajan said, “We have been very careful about doing this at a measured pace so that we don’t inflict more pain on the economy than it can handle.
“Thus far, we are comfortable with the pace at which deflation is taking place and is expected to take place given our targets. We have been understanding the inflation process better, and the pace of deflation that economy can tolerate.”
RBI’s executive director Michael Patra, who is in the monetary policy department, said when petrol and diesel are taken out of the inflation basket, one would still see that underlying inflation has not stabilised.
But, it has actually picked up, which is a matter of concern, because it includes non-tradables, inflation from which is very sticky, Patra added.
