Embattled RBI Governor Raghuram Rajan, who has been facing a lot of pressure over the last few months to cut rates, defended status quo in the monetary policy today, saying that he does not want to do a “flip-flop” on it and is looking for “certainty” on various factors, mainly inflation, before lowering the key interest rate.
Rajan also announced progress in talks with the government on the adoption of a monetary policy framework, saying the inflation target for January 2016 and beyond has been set at 4 per cent, plus or minus 2 per cent.
“We have to make sure that the (disinflation) process is well underway. We have had a couple of months (of low inflation) after five years of high inflation. We want to make sure that this is for real especially because we don’t intend to flip-flop,” Rajan told reporters at the post-policy media briefing after the 5th bi-monthly monetary policy, wherein he left all policy rates unchanged.
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“The Reserve Bank wants to get more certainty about the pace of inflation movement before changing its stance,” he said.
Rajan reiterated that the desire is to have a linear movement once RBI shifts its policy stance to being accommodative, adding that the central bank does not want one policy to offer a cut and the next to raise the rates.
Rajan, who is targeting to contain inflation at 6 per cent by January 2016, said disinflation process is underway and factors like the fall in global crude prices are positive for the country that imports over 80 per cent of its fuel requirements.
The consumer price inflation fell for the 5th consecutive month to 5.52 per cent in October, driven largely by base effects, while whole price index touched a five-year low of 1.8 per cent in the same month.
However, Rajan said: “A change in the monetary policy stance at the current juncture is premature. However, if the current inflation momentum and changes in inflationary expectations continue, and fiscal developments are encouraging, a change in the monetary policy stance is likely early next year, including outside the policy review cycle.”
On the new monetary policy framework, which would involve setting of a formal inflation target and accountability to deliver on the same, Rajan said talks with the government have progressed well and the details will be announced soon.
“The government has indicated that it is comfortable in setting a target of 4 per cent, plus or minus 2 per cent, as suggested by a number of committees, including the Urjit Patel committee for inflation beyond 2016,” he said.
RBI Deputy Governor Urjit Patel, under whose chairmanship a committee had earlier this year suggested adoption of inflation targeting under a new monetary policy framework like some countries do, said the medium-term inflation target will help guide the central bank towards a stable regime and help bring down the risk premium which gets attached.
Commenting on the actual working of the arrangement, which sets in after January 2016, Rajan said: “If we achieve the 6 per cent target, we will be at the upper edge of the suggested band of inflation and there will be work to do going forward.”
The timeframe for achieving the long-term targeted 4 per cent inflation is something which will have to be discussed, he added.
On the support from the government and the fiscal deficit number, he said it has assured that it is sticking to the target of containing that at 4.1 per cent in spite of troubling factors like uncertainties on the growth, which is limiting revenues.
While taking on corporates for repeatedly demanding rate cuts, Rajan said money market rates are already on a downward spiral even though RBI has not cut the rates.
He said however that the transmission is not happening to actual lending rates by banks.
Unless banks pass on the benefits accruing to them as a result of a dip in policy rates, chances of a rate cut by RBI are “mild”, he added.
“I do believe that there is a signalling effect and I do believe that once banks are confident that rates will come down and stay down, they may start passing through more to consumers,” the Governor said.
Rajan, however, maintained that he is not suggesting anything banks to lower their lending rates.
Meanwhile, Patel flagged some concerns which should be on the radar even as the global crude prices are sliding. He said the slide is a result of price wars between the conventional crude producers (OPEC bloc) and the upcoming shale gas players (primarily by the US), and we need to be sensitive that it may rebound as fast it has declined once the balance tilts.
After having dismantled the gold import curbs over the week, Rajan did not sound much concerned over the high imports of gold, saying that the dip in crude prices creates some room in the current account.
The move to do away with the 80:20 rule on gold imports was initiated from the government’s side and was a “reasonable” one, he added.