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While achieving an eight per cent retail inflation rate by January 2015 is well within reach, Reserve Bank of India Governor Raghuram Rajan notes there is a second target, of six per cent by 2016. Edited excerpts from his interaction with the media after announcing the policy review:
On reduction in SLR
The idea behind the SLR cut is if the government finances are improving, and the government is on a fiscal consolidation path, we can afford to liberate more access to government financing and make it possible for the private and public sector firms to get access to that financing. We are hopeful that as the economy picks up and credit growth gets stronger, banks would be able to use that space to lend to the productive sectors of the economy.
On liquidity management
We have looked at those oscillations (of call rates) and have said in the past that we're trying to keep the rate closer to eight per cent. Some of the oscillations are because of substantial and unanticipated variation in government balances. We are looking at the possibility of doing more frequent term repos, of shortening the maturity of term repos and perhaps also the timing of the auctions during the day, to minimise volatility.
On interest rate guidance
The market read our previous statement and put emphasis on certain words and de-emphasised on certain words. I don't think our stance has changed since last time. I think we see the short-term risks more balanced than last time. There is the issue of the monsoon and we have to wait and see how it plays out.
Let me emphasise, a significantly below-par monsoon does not necessarily mean a significantly below-par (food) production. It depends on where the monsoon is below par. There is no one-to-one correspondence between these. The government has stated quite frequently that it is keeping an eye on food production and taking steps.
What we are saying is that if disinflation proceeds as warranted, we will eventually have room to cut rates. I want to emphasise that RBI will not hold rates any longer than necessary. There is a path that we are trying to achieve.
On growth
We are not against growth but we do think growth will be most benefited if we disinflate the economy and we don't have to fight this fight again. Let's fight the anti-inflation fight once and let's win. That will create the best condition for sustainable growth.
I think the government, which has a long horizon in mind, given that we just had an election, is on the same page that lets us bring inflation down. Of course, the government has its role cut out and we have our role cut out.
The January 2016 inflation target
We are getting close to the year when our first target has to be met. Then, the question you are going to ask is, what about the second target? What we have to do is to remind people that there is a second target. It is a path. We kept saying eight per cent and six per cent. We need to also be confident of reaching the six per cent. Let us see how things go. I don't think we know how the disinflationary process will pan out. We have an anticipation; we think the eight per cent goal is well within reach.
Liquidity coverage ratio
We have in mind that we want to give banks more flexibility in meeting the liquidity coverage ratio and as we bring down SLR over time, they will have to make a decision on what they hold to meet the liquidity coverage ratio.
