Reserve Bank of India governor Raghuram Rajan Rajan said on Tuesday the central bank remained in an accommodative mode, cautioning that inflation in the services sector was cause for concern. The governor observed that while the rupee may have depreciated against the dollar, the currently had appreciated against several others.
Rajan observed that while there could be an initial bout of volatility following a hike in interest rates by the US Fed, the market would settle down subsequently.
The RBI has laid a lot of emphasis on vigilance on CPI…
We are still accomodative. I think that is very clear. We are always vigilant and so, this is not anything new. There are obviously both upside and downside risks to consumer price inflation. We highlighted some of the sources of risks going forward. One could imagine that there could be downside risks from say commodity prices, especially oil. But given where oil is produced there could also be potentially upside risks if there are political events that constrain the supply forward. So, vigilance is always needed.
Are we already prepared for an imminent Fed lift-off?
When times are warranted, we are always prepared to move off-cycle. But when times normalise, we prefer staying with the policy cycle. Of course, when we use the words ‘external developments’, one of them is what happens to be the Fed policy rate hike. There are some residual uncertainties about what the Fed will do. But my sense is, as I have said before, after an initial bout of volatility we probably should see Indian markets stabilise and come through. So, it’s not the central factor in our deliberations going forward.
What is the RBI’s assessment of the impact of the 7th Pay Commission on inflation?
In the broad sense, there is going to be additional expenditure. But it will be offset presumably by either additional revenue raising or cuts elsewhere, so that the fiscal consolidation path is maintained. So, in that sense, we don’t feel there will be a significant effect on aggregate demand provided we maintain the fiscal path. Of course investment in some ways may be of higher quality than certain kinds of spending and, therefore, one would hope that you would uncover space elsewhere for the public investment which we really need. I think the government has taken a number of these into account while anticipating the consequences of the pay commission. So, let us wait and see what happens.
What is your assessment on services inflation? And could be the pressure on inflation on account of GST?
Services inflation is obviously a source of concern and largely reflects the supply constraints; reasonable quality healthcare, reasonable quality education are relatively in short supply which is why you see higher inflation. That is one reason why we keep saying inflation is not just about food. Obviously, it gets impacted by things like taxes. As far as taxes go, that’s not a wage or price push inflation and we will have to figure out a way as and when GST comes in, and if there is a big change, how we account for that going forward.
What would be the consequences of excessive QE from the ECB and an apparent lift-off by the Fed on the Indian currency market?
It does creates problems for countries like ours because partly people are not aware of the concept of real effective or nominal-effective exchange rate. The one exchange rate that always matters is the Dollar-Rupee. So, at the same time, as we are saying dollar-rupee is weakest in the history of the Rupee, it turns out that we are pretty strong because we have appreciated versus the euro, yen and many Asian currencies. So, it does make the dialogue a little bit more difficult. The other aspect is that there are these volatile flows because you may see outflows from the euro area but flows back into the dollar area. We will have to manage it. Unfortunately, this is how the global monetary system is and we have to live with the way everything is. I hope down the line the euro area also strengthens enough that the Euro area contemplates a monetary normalisation.
How far are we behind China when it comes to internationalisation of our currency?
On some dimensions, we are ahead of China. Within the banking system we have taken some steps which took us ahead. But in terms of size of the economy, in terms of the extent of external trade and in terms of denominating trade in renminbi, I think they are much ahead of us. My sense is this is a process. We are taking steps, we are steadily moving towards being a much more opening economy while keeping some of the concerns over stability, making sure that we have things broadly under control.