Not investor, not market, consumer is the primary focus: Raghuram Rajan, RBI Governor

After hiking the repo rate by 25 bps, RBI Governor Raghuram Rajan said it is premature to say the monetary policy has moved towards inflation-targeting. Its primary focus is not the investor, not the market, but the Indian consumers so that inflation comes down and their welfare can improve. Excerpts from the post-policy media interaction:

You have targeted inflation in this policy. Should we understand that you are accepting the Urjit Patel committee’s recommendations of targeting CPI inflation?

The committee report is still being studied. Some of the recommendations require both the Government as well as the RBI to come on board. So, as and when we proceed on the recommendations we will have a dialogue with the Government.

The report has done substantial work on disinflationary stance. It is not directly targeting anything but saying that we need to bring down inflation and there would be very little disagreement about that.

Clearly, we have made a lot of noise on the CPI inflation for some time. The RBI has always focused on WPI and CPI but given the fact that CPI has stayed high for a considerable amount of time…we have to bring it down. The Urjit Patel committee report has given a timeframe by which we can bring down the CPI.

Will you move away from multiple to single indicator (inflation) approach? Will you look at CPI or only headline inflation number? What should the market expect?

The report has recommended flexible medium term inflation target. It is premature to say we have moved (the policy) towards inflation targeting. The best way to sustain growth over the medium term is to bring inflation down.

There is no trade-off between growth and inflation. That said, we are cognisant of the weak state of the economy, which is why any disinflationary stance should be taken into consideration. The important point here is that inflation is not really food inflation but more than that.

In your last policy, you were confident of growth in the second half of FY14. The momentum for growth has gone down now and you still hiked rates. Do we understand that growth has taken a backseat and you will be targeting inflation?

I think your juxtaposing growth versus inflation is a mistake. If we cut rates for example, do you think banks would have cut their deposit rates? The deposit rate is high because inflation is high. The customer wants a real rate of return. If you cut policy rates, it is not going to create an immediate reduction in the banks’ cost of funds nor filter through into the borrowers’ cost of funds and not going to create immediate demand. So, we have to get away from this sense that there’s magic to be done without bringing down inflation. The high vegetable prices cut into people’s budget and they don’t have money to spend on other things.

So, the notion that we can have strong demand without bringing down inflation has to be revisited. We have confidence that we can bring inflation to tolerable limits over the course of the year and that can give us some room on the monetary front. But first, let’s fight the fight that needs to be fought.

Vegetable prices have come off. So, could this (rate hike) have waited or you had to take it?

The decision was close this time as well. Last time, we chose to wait and this time we chose to act. Given that action needs to be taken, this time we saw that some of the noise by vegetables was taken off but some aspects of inflation were sticky and we needed a little more medicine and watch how it works in terms of the weak state of the economy and stabilisation of the rupee.

Is the advisory issued on withdrawal of bank notes prior to 2005 related to black money and fake currency?

Firstly, it is not intended to get at black money, tax evasion, etc. For that there are other instruments that the Government focuses on. But that is not to say we support black money or tax evasion.

This (RBI move) is a technical action in order to withdraw notes that have poor security features and an attempt to reduce the possibility of counterfeiting and give more reliable notes to the public and minimise any inconvenience to the public.

How well prepared are we now to face the external debt situation and does your policy decision have to do anything with the sell-off in the emerging market currencies?

Over time, we have decided to focus on getting macro stability in India and the rest will follow. Current account deficit has reduced in the last few months.

Going forward, (there will be) fiscal stabilisation, monetary stabilisation, which is part of macro stabilisation and thereafter, foreign investors will come.

Bringing down inflation is a way of assuaging investors about the long term future of the country and their investments.

The primary focus is not the investor, not the market, it is the Indian consumer, that how do we bring inflation down so that their welfare can improve.

(This article was published on January 28, 2014)
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