The RBI will not react to every spike in inflation with a rate hike, especially in a slowing economy, says governor Raghuram Rajan. In an interaction with the media and analysts, Rajan says the central bank continues to be vigilant on the inflation front:
How should we read your policy today? What should we expect when the CPI is 10.5% and when it’s 10%?
It is important to resist from labels like ‘dovish’ and ‘hawkish’ here. We are trying to calibrate monetary policy, primarily to target inflation in an environment where the economy is weak. So, when we take action, we have to be convinced that it has merit. We want to wait for more data. I can’t tell you that if inflation is at ‘x’, we will raise the rates by ‘y’. It is not based on one particular indicator. We need to see a substantial softening of headline inflation as well as momentum in the right direction.
How concerning is growth slowdown? Would the next GDP and IIP numbers be as important as inflation?
Certainly, we will look at the growth numbers. Our sense is that growth is below potential even now and this extent of negative output gap should be seen in the inflation numbers. If the transmission is not taking place, we have to question our assumptions and that would be an important factor as well.
Given recent IIP and other numbers, are you still confident of a pick-up in H2?
We believe growth in the second half will be stronger. Of course, there are factors like agriculture, exports and revival of stalled projects. It is important that government and RBI remain vigilant. Give or take a few basis points, we are standing by our projections.
Is the RBI happy with the kind of monetary policy transmission that has happened so far?
When the RBI cut rates, these were not transmitted. So, there seems to be a certain amount of lag in these things or a lack of response. Going forward, we will have to calibrate policy to circumstances.
Your concerns on fiscal deficit?
The government has reiterated its commitment to the fiscal deficit target. My own sense is that the government is firm on achieving it and will do so by March end. That would mean a certain amount of expenditure contraction in Q4 and that would mean some impact on growth. An increase in disinvestment and greater revenues from companies