Raghuram Rajan optimistic about meeting inflation target of 5%

RBI Governor Raghuram Rajan today exuded confidence that inflation target of 5 per cent for March 2017 will be met as also that there will be no market disruption on account of foreign deposit redemptions worth over USD 20 billion.

Rajan, who demits office on September 4 after completion of 3-year tenure, also said that today's was likely the last of the Governor-led monetary policy reviews, as the future ones will be carried out by the six-member panel.

"We are within the inflation band given to us by the government and expect to be around 5 per cent CPI inflation target by March 2017, absent unforseen eventualities... Broadly, we are comfortable that we should be reaching the 5 per cent target," Rajan told reporters after announcing the third bi-monthly review of the monetary policy, 2016-17.

Under its agreement with the government, RBI is committed to anchoring retail inflation at 4 per cent (plus/minus 2 per cent) and has set itself a target of 5 per cent by next March as part of a 'glide path' to achieving the median mark.

Rajan said today's policy review, his last as the head of RBI, will most likely be the final one done by the Governor as the Monetary Policy Committee (MPC) will take over from the next policy announcement scheduled for October 4.

The government has already started the process of identifying its three members for the panel, while RBI has nominated executive director Michael Patra to be its nominee on it, in addition to the Governor and the Deputy Governor in-charge of the monetary policy department Urjit Patel.

The Governor will have a casting vote once the country shifts to the panel system.

"The MPC is a fundamental institutional reform which modernises our monetary policy framework and builds a strong platform for a strong and sustainable growth," Rajan said, adding its collateral benefits besides lower inflation will include stable currency and higher real interest rates.

Meanwhile, with the system staring at an outflow of USD 26 billion in foreign currency deposits (FCNR-B) raised during the time when the rupee was bleeding in September-November period of 2013, following the 'taper tantrums' in the summer of that year, Rajan sought to assuage concerns of the banking system saying RBI will ensure there is no market disruption because of it.

Rajan said he expects headline inflation, which climbed to

22-month high of 5.8 per cent in June, to cool down on a positive impact of the good monsoons, disinflationary trends on services and also expectations of energy prices continuing to be softer.

On food inflation, he said there is a seasonality in the higher vegetable prices at present, while the sowing patterns also suggest there being a possibility for the prices of pulses and cereals to come down.

Rajan said RBI will see through the mechanical increase in inflation because of higher housing rent allowance as part of the 7th Pay Commission which will be a one-time effect, but will look out for inflation getting "generalised".

He also sought to downplay the concerns on Goods and Services Tax being inflationary, and similar to the impact on pay panel awards, saying RBI will look for generalised inflation because of it.

"I do not think it is wise to assume GST will be inflationary," he said, adding that RBI has done studies and modelling on its effect on inflation.

Patel said as much as 55 per cent of the Consumer Price Index basket is outside the GST ambit and therefore unaffected and added that it may at worse have an one-time impact on inflation.

Rajan said the GST will have a positive impact on growth and hinted that he concurs with estimates pegging the GDP benefit of the indirect tax reform at 2 percentage points.

He also said, GST need not be inflationary as some prices will come down on lower taxes while others may move up a bit. But it is not wise to conclude that GST is inflationary, he added.

On FCNR (B) account redemptions, Rajan said that "with a forex kitty of over USD 365 billion, we have sufficient reserves to handle the problem", and added that 80 per cent of potential outgo has been secured by the central bank in the forwards market.

Rajan, however, came down heavily on banks for holding on to higher lending rates even after a 150 bps reduction of interest rates by the RBI to customers and maintaining an accommodative stance and also easy liquidity conditions.

Rajan said the lenders, who are blaming the FCNR redemptions for their reluctance to lower the rates now, will "find another reason" for holding back the rate cuts once this episode is over.

He said RBI is incorporating the learnings since the introduction of marginal cost of funding based lending rate (MCLR) and will be revising the norms soon.