Raghuram Rajan says future monetary policy to be inflation data-driven

Written by PTI | Mumbai | Updated: Sep 30 2014, 21:28pm hrs
Raghuram RajanRaghuram Rajan spoke about many positives on the inflation front, like the low oil prices, stable exchange rates and a tempering in rural wages growth. (PTI)
Inflation is panning out as per the Reserve Bank's expectations and the monetary policy going forward will be dependent purely on data releases, Governor Raghuram Rajan said today.

"We are currently positioned to reach the 6 per cent (inflation target) by 2016...as of now we are reasonably set, our expectation is that we will reach that target.The (future) policy will be data-contingent," Rajan told reporters after announcing the bi-monthly policy review.

Rajan, who chose to hold on to the key rates at the policy review today, said the target of having inflation at 8 per cent by January 2015 is easier than the "harder" task of getting it down to 6 per cent by January 2016.

"We are a little better than we were in August, but there are still risks in achieving the 6 per cent target," Rajan said. The RBI had first talked of the upside risks to the 6 per cent inflation target at the August policy review.

When pointed out to the differences between the monetary policy report, which projects inflation to be at 7 per cent by January 2016, as against the more optimistic picture presented in the policy statement, Rajan conceded to the discrepancies.

"There are some discrepancies between our modelling of inflation, which says it will be 7 per cent and the inflation stance or the policy stance taken by all of us putting our judgement also to work. Our judgement is that given all that we know about what is happening, and some of it is models plus subjectivity, that we can still reach 6 per cent by Janaury 2016 given where we are today," Rajan explained.

Rajan, who has hiked interest rates thrice in the last 13 months that he has been at the helm as the central bank Governor, has been driving policy with a focus on containing price rise. The RBI has a "glide path" for inflation, under which it wants to reduce the price rise.

The consumer price inflation, which is being used more increasingly by the RBI since Rajan took over, eased to 7.8 per cent for August.

Rajan today spoke about many positives on the inflation front, like the low oil prices, stable exchange rates and a tempering in rural wages growth, but also pointed to risks like the evolution of food prices following the deficient monsoons.

"If the data come in and say that we are going to miss the 6 per cent inflation target, we will have to tighten and if the data say we are going to do better than 6 percent or earlier than January, we will be more accommodative," he added.

Rajan said there is no real interest rate which the RBI is targeting, but said there is a need for households to invest more in financial products, saying investments in those have suffered due to a perception of negative returns and also some tax incentives going off.

On the policy move on the statutory liquidity ratio front, wherein the component of the liquidity coverage ratio has been increased to 5 per cent from 2 per cent, Rajan said the intention is to give banks sitting with liquid securities the required flexibility in management.

He also affirmed that over time, as the government finances improve, the SLR will be brought down further. In the past two policies, he had reduced SLR to 22 from 23 per cent.

With fears of a hike in interest rates in developed world which can lead to a pullback from investments, deputy governor Urijit Patel said such an eventuality will certainly constrain the "elbow room" for the RBI because of the integrated nature of the markets, but asked not to be overtly concerned about it.

On real estate, the Governor said the appreciation in property rates is in tandem with the inflation in majority of cases, and added that the RBI is not concerned from the lenders' perspective as well because there is an equity component which house buyers get in while getting a loan.