‘I think most people expected a rate cut’

“My name is Raghuram Rajan and I do what I do,” said the RBI Governor in jest at a press meet (to announce the fourth bi-monthly monetary policy) to a question on whether the dovish policy is accompanied by a hawkish statement. “I don’t know what you want to call me – Santa Claus (this is what a TV journalist called me earlier), you want to call me hawk?” he asked.

With retail inflation sliding into RBI’s comfort zone, the apex bank on Tuesday cut the policy repo rate by a more-than-expected 50 basis points in order to give a leg up to the slowing economy. The Governor, however, emphasised that the RBI wasn’t sort of throwing out a Diwali present but really this was about, given the state of the economy, how can we move it forward.

In his preliminary comments, Rajan said the global environment is looking weak for a variety of reasons. Undoubtedly, this is not good news for India because no country is an island. But there is opportunity even in the worst news. We can stand out as a country which still promises strong, sustainable growth. The possibility of realising this opportunity should encourage us to redouble our efforts to implement our past announcements and to undertake new reforms. The economy has legacy problems to deal with and there are no silver bullets, as I have said repeatedly.

We got to be working very hard with the government on this (transmission of rates). So, the intent here is to not, sort of, point fingers at other people but to start moving quickly on ensuring that transmission does take place. Of course, there are limits to how fast it can happen but we believe that some will take place very soon and more will take place over time.

Excerpts from the media interaction:

Did you consider the possibility of a Fed lift-off when you cut the repo rate?

We clearly pay attention to what the Fed is doing as well as other central banks because it does affect the economy through foreign investment. So we have to pay some attention to it. But I can’t say it is the central issue that we focus on when we discuss the monetary policy. It is one of the many concerns that we look at.

As far as transmission goes, we want to encourage faster transmission and we will do what is needed. What we need to look at going forward is to see that we have greater comfort on the inflation path. Some of it is predicated on positive developments for inflation, stemming from the global economy. There are also risks to inflation, including the weak monsoon and its effects on food prices.

What is your take on services side inflation?

I think the previous risks to inflation which we are watching are on the services side (where capacity, you know it is hard to determine what the capacity is in the services side), and inflation in areas like healthcare, and education have been high over the past few years. Now, there are some signs of it coming down but that is when we have to be very watchful, of course, in addition to the consequences of the monsoon and whether they are contained. But food management can help a lot in keeping food prices low. Where we need more capacity creation is in areas of services where we are possibly running into bottlenecks related to human capital — availability of teachers, doctors, so on.

What prompted the 50 basis points cut?

I think the policy is very clear that since our last policy statement, the conditions that we had laid out for further accommodation have been broadly met, except perhaps monsoon (we haven’t seen a good monsoon). But at the same time we haven’t seen food prices, except in the case of vegetables and pulses, go up. And there is some sense that the government is working to bring some of those down.

But we have also seen a dramatic reduction in the external environment, including the news on China which has had a tremendous effect on commodity prices, including on oil, and prospects for these commodity prices, going forward.

So, if you see around the world, there is a general sense that global activity is actually going to be further downgraded from what we thought in August. So that gave us a sense that we probably could look for a little more room, given that that would also impinge on domestic demand and as Dr Patel (Deputy Governor) said, capacity utilisation, which really is the first factor which leads to more investment is still very tepid and that would suggest there is room for more domestic demand which will be non-inflationary and then that will eventually create more investment. Ultimately, we also need investment to create the supply which holds longer term inflation in check. So, we need to re-start investment. Corporate investment has been weak and investment intentions have not picked up yet. So, these are the factors which suggested that we could use the maximum room which inflation forecasts gave, which took us to 50 basis points.

I will never predict what financial markets do. I think we should be prepared for anything the financial markets do. But repeatedly I have said, our best protection against financial market turmoil and surviving financial market turmoil is good policy. And good policies that result in sustainable growth ultimately are what will, sort of, protect us from what is happening in the rest of the world.

Again, we want to make sure that the words sustainable and growth go together. Both are important and that is why we used what room we had. But I don’t think we were excessively aggressive. We weren’t sort of throwing out a Diwali present but really this was about, given the state of the economy how can we move it forward.

I think most people expected a rate cut. Nobody expected a pause. That was good. Now the extent of the rate cut — to some extent we were influenced by international developments since last time, which suggested a much weaker external environment.

If you look at our exports, for the first time, volumes also were a little weaker this time around. All of which suggests that we have to live in turbulent waters for a little while longer. So, that was why the policy was a little different from what people expected.

Have you set an interim inflation target?

We have said that we aim to get retail inflation down to 5 per cent by the end of fiscal 2016-17. We had announced 4 per cent by end of fiscal 2017-18 in the April policy of this year. So, we are refining that by saying the interim target would be 5 per cent by fiscal 2016-17 end. That means about one-and-a-half years to disinflate a little more. Now, remember the average for this year is approximately 5 per cent. Of course, we have benefited from some good external factors but we also had a very difficult monsoon. So, we have to do a little more to get us to the 5 per cent over the next year. We think it is feasible. After all, we came down two percentage points over the last year. Going further down becomes more and more difficult over time. But we think 5 per cent is eminently feasible, given where we are.

How is the problem of power distribution companies being tackled?

The government, of course, is fully cognisant of the problem in the power sector as are we. We don’t intend to kick the can down the road as perhaps has been the unintended consequences of past policies. So, we need to take a very careful decision here to put the power distribution companies back on track with healthy capital structures and absorb the debt that has been created over time in the right place, with the right sort of interest rates. So, that is the intent of what we are working on with the government, with the States and hopefully we will get a resolution which will help the power discoms look ahead. Obviously, there will be lot of contingencies in the final resolution that the States will have to meet, that the Centre will have to meet, as well as actions for the RBI.

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