Premature to say were moving towards inflation targeting: Raghuram Rajan

Updated: Jan 30 2014, 02:48am hrs
Raghuram RajanThe RBI has no immediate plans to move into an inflation-targeting mode, but will aim to bring it down decisively over the next one year, governor Raghuram Rajan said.
The RBI has no immediate plans to move into an inflation-targeting mode, but will aim to bring it down decisively over the next one year, governor Raghuram Rajan said on Tuesday. At a press meet after the third quarter policy review, Rajan said the central bank is cognizant of the weak state of the economy, but the very reason for it is high and prolonged inflation. The RBI's measures, including Tuesday's rate hike, will bring down retail inflation to 8% over the next one year, he said. Excerpts:

Have you accepted most of the recommendations of the Urjit Patel committee

The Urjit Patel committee report is still being studied and some of the recommendations require the government and RBI to come together. So, as and when we proceed with them, we will have to have a dialogue with the government. I think as far as today goes, we are taking a piece where the committee has done a substantial amount of work in talking about a disinflationary trend. The committee gives us a time-frame that is reasonable to bring down the CPI to a reasonable level. I think there won't be a lot of disagreements on this.

Are you moving towards inflation-targeting since you said some recommendations of the committee would be adopted

I did not say we have accepted inflation-targeting, but we are looking at it. The Patel committee has recommended flexible medium-term inflation-targeting. What requires the governments support, we will take it up with the government. It is premature to say that we are moving towards inflation-targeting. Time and again in our mandate, we have said we need to bring inflation down. We have also said that for us to sustain growth, we need to bring inflation down; there is no trade-off between growth and inflation.

Will growth be a second priority to inflation

I think juxtaposing growth versus inflation is a mistake many people are making. If we cut rates right now, do you see banks going ahead and cutting rates No. The deposit rate is high because inflation is high. The customer wants a real rate of return. If you cut rates, it is not going to create an immediate reduction in banks' cost of funds and create immediate demand. Weve the confidence to bring inflation down. But first lets fight the fight that needs to be fought.

Has the recent emerging market sell-off anything to do with the policy move

Over time, we have decided to focus on getting macro stability; the rest will follow. We should focus on the domestic environment looking a lot healthier. Some of that was through reducing CAD in last few months. Going forward, fiscal and monetary stabilisation is a part of getting macro stability and, once we do that, foreign investors will come.

How important is transmission in achieving 8% inflation going ahead

It is important. The transmission will get stronger as inflation falls. I think inflation at the level that it is, there is very little traction that you can get beyond a certain point. The disinflationary process that is under way, coupled with the monetary tightening that we have done, will give us more traction over time. It could happen in multiple ways; some of it could be through banks hiking rates.

The action is hawkish, but the guidance is dovish. So, what message do we take

We are neither hawks nor doves. We are actually owls. An owl is traditionally a symbol of wisdom. We are vigilant when others are resting. So, the broader point is don't try and put us into buckets, we are doing what is necessary for the economy. The last time we said we are waiting for data, it conveyed we are ready to act. We said we would act if certain conditions were violated. Those conditions, core inflation coming down, were violated. Therefore, we acted. Of course, we think if our plan works out and inflation falls, we will have room to cut interest rates.

How are we placed to deal with external shocks

We are better prepared, CAD number, we have put out, is far better at 2.5%. We can comfortably say it will be below 2.5% for 2013-14. We are watching flows as well. We have built up reserves somewhat. One of the points made in the policy is that we have allowed the oil marketing companies to buy dollars to pay us back when they have to pay swaps. If that process runs into trouble, we can settle the swaps in rupee terms rather than going to the market. So we should not see an overhand of dollar purchases. That said, we are watching flows too. Over the last month, we did attract short-term flows into debt market. Some of the volatility in last few days has been created by those short-term flows leaving. Now overtime we have to figure out how much we want to expose ourselves to those short-term flows. But I am glad even during the July-August selloff, long-term flows, debt or equity, stayed with us. Those investors are worried about inflation.