 "At this point, we think we can meet 6% inflation target: Raghuram Rajan")
Interacting with the media after the announcement of the bi-monthly monetary policy review on Tuesday, Reserve Bank of India (RBI) Governor Raghuram Rajan asked India Inc not to be complacent about its foreign exchange exposure, adding it should hedge its forex liabilities. Edited excerpts:
RBI's medium-term objective is six per cent Consumer Price Index (CPI)-based inflation by January 2016. However, the Urjit Patel committee, which reviewed the monetary policy framework, suggested a target of four per cent (+/-200 basis points). How do you plan to achieve this?
As of now, there is no consensus on what the ultimate inflation target will be. As the finance minister had announced in the Budget, during the course of the year, we will develop an understanding with the government about what the desired objectives of monetary policy are, beyond the medium term, that is, beyond January 2016; also, the structure of monetary policy-making, the committee and the framework to be put in place. The government has to indicate how it wants to take this forward...what form it will have, whether it will be an Act, by reforming the RBI Act, or whether it will be a government statement...all these will be discussed.
Statistical models, as highlighted in RBI's monetary policy report, suggest seven per cent inflation in the fourth quarter of 2015-16. If that is the case, why are you not raising the interest rate?
Our models are work in progress. One of the things you have to learn is models are tools; they are a not a crutch to give up thinking. What we do is get an output from the model and put our own estimates into what the models are missing out on, what they cannot capture…we get a sense of where we are.
In the past few months, we have seen disinflationary pressures are more than anticipated. So, factors such as a sense of fiscal correction going on are taken into account, in subjective views. We put our views on what the model brings out. Following the current policies, we will still have inflation of about six per cent in January 2016.
If we relied only on the model and what it said on the policy rate, we wouldn't need Deputy Governor Urjit Patel or Executive Director (Deepak) Mohanty or me to think about where we should be. Our policy-making is not mechanical on what the model brings out; it is informed by the model.
If the US Federal Reserve raises interest rates, will it put pressure on RBI to raise rates, too?
What an increase in US interest rates will do is put pressure on capital flows. I hope after the initial volatility, which might be seen when people start anticipating a rise, rather than the actual event of the rise, the financial markets become more discriminating between countries with good macroeconomic prospects and countries with uncertainty. Political prospects also matter and, as I have repeatedly said, the strong mandate in the (Lok Sabha) elections, resulting in a strong government, is a positive for India.
I don't think the US Fed raising rates is inconsequential. But our policy stance will be determined by our views on the evolution of inflation, not as much by outside forces.
RBI might meet the eight per cent inflation target by 2015, but meeting the next target of six per cent by 2016 is seen as challenging. In such an environment, do you think reducing interests will be difficult even if the near-term target is met?
The Urjit Patel committee said the six per cent target was an interim signpost on the way to the ultimate goal. As it is hard to think about two years ahead, we have said let's think about a year ahead.
When we started this, headline inflation was about 11 per cent. At that point, getting to eight per cent was a big ask. Now that we are nearer, we are fairly confident of reaching there (eight per cent).
At this point, we think we can meet the six per cent inflation target. Actually, it is two per cent disinflation in a year, and another two per cent the next. In that sense, these are equal, unless you believe disinflation gets progressively harder.
With the exchange rate stabilised, many companies aren't keen to hedge their foreign exchange liabilities. How concerned are you about their unhedged foreign exchange exposure?
We are monitoring the situation, though the data on this aren't as good as one might think. Our sense is unhedged exposure is significantly higher than it ought to be. With the stability of the rupee, people are getting too comfortable. I also want people to note though the rupee seems to be depreciating, it is primarily against the dollar. If you look at other currencies and take a 36-country average, the rupee is actually appreciating. So, I think one shouldn't be overly comfortable and leave positions unhedged. Volatilities emerge often, at times unexpectedly. We have said we are not targeting a particular level of exchange rate, but we try and diminish undue volatility. That does not mean no volatility; it does not mean the exchange rate won't adjust to fundamental changes.
So, I don't think people should be overly complacent and leave positions unhedged. Time and again, it does come back to hit companies.
RBI has issued draft norms on licensing for small and payment banks. Will such norms be announced for wholesale and investment banks, too?
Given the structure we have proposed, with a regular (universal) banking licence, one can do wholesale banking. The idea is you will be able to raise funds, large and long-term funds, and not be subject to the regulatory obligations (such as cash reserve ratio and statutory liquidity ratio) regular banks are subject to. Today, with long-term bonds, one can do infrastructure and low-income housing, which are big sources of investment in the economy. Wholesale banks are either universal banks with long-term financing or finance companies. Today, a non-banking financial company pretty much does the same thing a wholesale bank does. So, I don't see the need to invent a wholesale bank.
RBI's medium-term objective is six per cent Consumer Price Index (CPI)-based inflation by January 2016. However, the Urjit Patel committee, which reviewed the monetary policy framework, suggested a target of four per cent (+/-200 basis points). How do you plan to achieve this?
As of now, there is no consensus on what the ultimate inflation target will be. As the finance minister had announced in the Budget, during the course of the year, we will develop an understanding with the government about what the desired objectives of monetary policy are, beyond the medium term, that is, beyond January 2016; also, the structure of monetary policy-making, the committee and the framework to be put in place. The government has to indicate how it wants to take this forward...what form it will have, whether it will be an Act, by reforming the RBI Act, or whether it will be a government statement...all these will be discussed.
More From This Section
As of now, our focus is six per cent CPI-based inflation. Let us see how discussions with the government evolve. Also, there might be a further target beyond that (six per cent); that will leave no room for accommodation.
Statistical models, as highlighted in RBI's monetary policy report, suggest seven per cent inflation in the fourth quarter of 2015-16. If that is the case, why are you not raising the interest rate?
Our models are work in progress. One of the things you have to learn is models are tools; they are a not a crutch to give up thinking. What we do is get an output from the model and put our own estimates into what the models are missing out on, what they cannot capture…we get a sense of where we are.
In the past few months, we have seen disinflationary pressures are more than anticipated. So, factors such as a sense of fiscal correction going on are taken into account, in subjective views. We put our views on what the model brings out. Following the current policies, we will still have inflation of about six per cent in January 2016.
If we relied only on the model and what it said on the policy rate, we wouldn't need Deputy Governor Urjit Patel or Executive Director (Deepak) Mohanty or me to think about where we should be. Our policy-making is not mechanical on what the model brings out; it is informed by the model.
If the US Federal Reserve raises interest rates, will it put pressure on RBI to raise rates, too?
What an increase in US interest rates will do is put pressure on capital flows. I hope after the initial volatility, which might be seen when people start anticipating a rise, rather than the actual event of the rise, the financial markets become more discriminating between countries with good macroeconomic prospects and countries with uncertainty. Political prospects also matter and, as I have repeatedly said, the strong mandate in the (Lok Sabha) elections, resulting in a strong government, is a positive for India.
I don't think the US Fed raising rates is inconsequential. But our policy stance will be determined by our views on the evolution of inflation, not as much by outside forces.
RBI might meet the eight per cent inflation target by 2015, but meeting the next target of six per cent by 2016 is seen as challenging. In such an environment, do you think reducing interests will be difficult even if the near-term target is met?
The Urjit Patel committee said the six per cent target was an interim signpost on the way to the ultimate goal. As it is hard to think about two years ahead, we have said let's think about a year ahead.
When we started this, headline inflation was about 11 per cent. At that point, getting to eight per cent was a big ask. Now that we are nearer, we are fairly confident of reaching there (eight per cent).
At this point, we think we can meet the six per cent inflation target. Actually, it is two per cent disinflation in a year, and another two per cent the next. In that sense, these are equal, unless you believe disinflation gets progressively harder.
With the exchange rate stabilised, many companies aren't keen to hedge their foreign exchange liabilities. How concerned are you about their unhedged foreign exchange exposure?
We are monitoring the situation, though the data on this aren't as good as one might think. Our sense is unhedged exposure is significantly higher than it ought to be. With the stability of the rupee, people are getting too comfortable. I also want people to note though the rupee seems to be depreciating, it is primarily against the dollar. If you look at other currencies and take a 36-country average, the rupee is actually appreciating. So, I think one shouldn't be overly comfortable and leave positions unhedged. Volatilities emerge often, at times unexpectedly. We have said we are not targeting a particular level of exchange rate, but we try and diminish undue volatility. That does not mean no volatility; it does not mean the exchange rate won't adjust to fundamental changes.
So, I don't think people should be overly complacent and leave positions unhedged. Time and again, it does come back to hit companies.
RBI has issued draft norms on licensing for small and payment banks. Will such norms be announced for wholesale and investment banks, too?
Given the structure we have proposed, with a regular (universal) banking licence, one can do wholesale banking. The idea is you will be able to raise funds, large and long-term funds, and not be subject to the regulatory obligations (such as cash reserve ratio and statutory liquidity ratio) regular banks are subject to. Today, with long-term bonds, one can do infrastructure and low-income housing, which are big sources of investment in the economy. Wholesale banks are either universal banks with long-term financing or finance companies. Today, a non-banking financial company pretty much does the same thing a wholesale bank does. So, I don't see the need to invent a wholesale bank.