 "Until you get reserves to Chinese levels it is probably not enough: Rajan")
Reserve Bank of India governor Raghuram Rajan said the central banks objective is to move to a stable monetary policy and it is important to look through transient factors for framing monetary policy stance. Excerpts from an interaction with researchers:
Is RBI moving towards targeting term repo rate for monetary policy mechanism?
We are trying to ensure that the call money rate is close to the repo rate. Clearly the call money rate will be affected by the amount of liquidity that is available in the market and the amount of liquidity is affected by quantity of term repos that we do. I would presume that the term repo rate will be close to the call money rate because of our intent close to the repo rate. In the term repo rate there is a compensation for duration of maturity which will make it slightly different from overnight repo rate.
Don't you bringing down inflation to 6% will quite certainly need additional tightening?
We have effectively about 2 years to reach 6 per cent inflation as so to that extent we believe that the time frame in which we are planning to reach the 6 per cent gives us the opportunity to do it without as much of a hike in interest rates as would be required. Obviously government policies will help. For example if the government is more circumspect on agricultural support as they have been last year that would help mute food price inflation. A good budget to the extent that it builds confidence about the longer term fiscal health of the country and deal with longer-term inflationary pressures will also quell inflationary expectations. There is a bunch of things which could help but as I said in the policy right we are appropriately set given what we know.
Can you please share the qualitative adjustments or support measures that you would speak with the government to keep inflation low?
I did outline some measures that we think would be useful. Clearly, a reduction in subsidies and perhaps targeting more investments will help. To that extent that it does not increase overall short-run demand but increases longer run supply would also be helpful on the inflationary front.
Will it be correct to say that interest rate movement is now largely focused on 6 per cent January CPI target?
The monetary policy is often intended to be as stable as possible. We should not react to every change. As we start the easing cycle, it should move to that direction rather than ease for a little while and then tighten again. We would want to have relatively stable monetary policy to the extent that we find a substantial amount of room builds up before the interim target is reached.
At one stage inflation was largely being led by vegetables. Now that vegetable prices have corrected, it is been said other food inflation is rising along with core inflation. Would interest rates remain high until CPI target is achieved?
We are trying to forecast what CPI will be. We are setting interest rates with the idea that we will achieve certain level of CPI at a particular point of time. Which means that we are willing to look through transient increases in CPI or transient decline in CPI. We are willing to look through these with a view of achieving the medium term goal that we have set. Interest rates would be set with that in mind and won't react again to every blip that happens.
RBI said that the potential growth of the economy is around 6 per cent and possibly slightly lower. What is the need to cut rates and revive growth? Should inflation trajectory be better than envisaged?
If disinflation is stronger and we anticipate it and we believe that we can go through the 2015 goal and to the 2016 goal in a smooth way, we would certainly be prepared to cut interest rates.
Is RBI comfortable with India's reserves adequacy position?
We have a lot of reserves and right now of about $300 billion plus. If you focus on reserves there is no point where you feel safe. Until you get to Chinese levels it is probably not enough. Our focus should be on creating the policy environment which gives investors confidence. From the financial sector side we at RBI are trying to provide this kind of confidence. This is a far better way. Our interventions in exchange markets have historically been to reduce exchange rate volatility. That is just not volatility today but also anticipated volatility if the exchange rate becomes unduly strong in a short while because of extreme inflows and unduly weak in a short while because of extreme outflows. To that extent where we have to intervene and prevent volatility, we have plenty of reserves.