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RBIís monetary policy statement has given market participants the impression the central bank will hike repo rates if it finds core CPI hasnít moved much. In an interview to Aparna Iyer and Shobhana Subramanian, RBI governor Raghuram Rajan suggests the markets may be over-reacting since the CPI isnít fully established as yet. Rajan added that while monetary transmission took place in many ways, the forward-looking expectations channel was largely adaptive. Edited excerpts:
Are we to conclude the RBI will raise the repo rate in January if core CPI doesnít fall but headline CPI does?
We need to see both conditions. I would like to see both a decline in headline inflation as well as core inflation ó the 3% core WPI is a number that the RBI has been put out for some time. We have not put out a number for CPI because I am not too sure that I understand the series and I am not too sure that understand how to deflate and therefore I donít want to put out a number. I think the clear message is that we want CPI to come down.
Since services growth is slowing, is the CPI flawed?
Thatís why I said let us give it time. One possibility is that certain prices are not getting adjusted and over time they would adjust. What I want to do is to react to data that I can understand. Monetary policy today will have effects six to nine months from now. Let us try to see what the consequences are of what we have already done. Reacting to numbers on a six-weekly basis may not be warranted. I have not said we have paused, I have only said we are waiting for more data.
RBI hikes rates but banks are cutting them... Where is the transmission?
Our actions since September have effectively reduced the cost of funding because we moved down from higher rates. But whether the current rates are sufficient is something that we will have to look at the data and decide. There are multiple ways through which transmission plays out. One is through the negative output gap, we could make it even more negative by hiking rates. Consumption demand is weakening, we could weaken it more. There is an expectations channel. I am not sure how strong forward-looking expectations channel is. There are adaptive expectations.
Are we in stagflation?
Both in 2010 and in