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Reserve Bank of India Governor Raghuram Rajan spoke to journalists at a post-policy press conference. Edited excerpts:
Will you now target the CPI (Consumer Price Index) only, as suggested by the Urjit Patel committee?
The report is still being studied. Some of the recommendations require the government and RBI to come on board. The fact is we need to bring down inflation. As CPI has remained high, we have to bring it down. The Urjit Patel committee has given a reasonable time to achieve that. The fact that the index isn’t perfect doesn’t stop us from starting that exercise.
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So, is inflation targeting the way to go? What should the market expect?
We haven’t accepted the report; we are looking into it. We will take up with the government what we need to do. The best way for us to sustain growth is to really bring down inflation. There is no trade-off between growth and inflation. Growth is surely a problem; so, we need to calibrate that process. Inflation is not merely food inflation, it’s more than that.
In your effort to bring down inflation, has growth taken a backseat?
The juxtaposition of growth & inflation is not correct. Even if we cut rates, banks won’t cut rates. We have to get away from the fact that there is a magic wand. The notion about inflation being irrelevant has to be revisited. We are confident we will bring down inflation within more tolerable limits. Let’s first fight the fight that needs to be fought.
The monetary development report talks about a muted recovery in GDP growth. What will be your strategy?
Our projection for the coming years is between five and six per cent. A lot depends on large projects coming back on stream. That will help change the sentiment for the private sector to be in the investing mode. There has been a huge fall in corporate investments, which has to pick up. A period of no-investments itself creates that environment for a pick-up, as they will find they need new investments. That large projects are starting up, coupled with a better external environment and, therefore, exports picking up will all combine to push us to stronger growth.
Growth forecasting is a very inexact science. So, it's better not to project what it will be. Instead, try and create conditions that when it emerges, it can be strengthened. We need to create the environment for a strong recovery. Inflation is part of that environment. We will have to see how our steps play out. The government is also creating conditions for growth. We will work jointly.
Vegetable prices have come down but RBI is still focused on core inflation?
Last time, the decision was close but we chose to wait. This time, too, the decision was close but we decided to act. At this point, we think we had to deliver some medicine, which we have done. Let’s see how it goes. We have to wait and see, given the external as well as domestic uncertainties. The primary focus is not the markets; it’s the Indian consumer.
The Patel committee has put a lot of onus on the government. How does it work?
There has to be a dialogue on micro-stability. Both of us will have to work hand in hand. Given the government’s fiscal road map, we don’t think the monetary policy goals are inconsistent with that. We need a disinflationary process.
How much monetary policy transmission are you expecting this time?
It’s important, obviously. The transmission will become stronger as inflation comes down.
So you are focused on CPI?
We are very far away from targeting CPI. But we will walk that path.
Why release the monetary development report on the same day?
So that you don’t have to second-guess monetary policy actions the next day
The monetary policy action is hawkish, but the guidance is dovish
We are neither hawks, nor doves. We are actually owls, which are signals of wisdoms. We are vigilant when others are resting. The broader points is don’t put us into buckets. Last time, we needed to convey the signal that we are ready to act. This time, we have acted. We will take action on the rate cut front whenever the situation warrants.
If inflation is around 8% or so next time, what’s the rate action will look like next time?
No central bank ever binds itself to when it will take rate action. We will wait for more data before taking further steps.
On plans to withdraw pre-2005 currency notes
It’s not intended to target black money, tax evasion etc. This is a technical action to introduce notes with additional security features and minimise counterfeiting. There is no plan to involve any other agencies.
