The war on inflation will be fought on many fronts and not just on the fiscal one, believes Reserve Bank of India?s deputy governor Subir Gokarn. Therefore, a mere correction on fiscal deficit or more prudence on the fisc may not necessitate a rate action by the central bank. Speaking to Aparna Iyer, Gokarn says that impact of weak monsoon on inflation is far more worrisome than its influence on growth.
In the macroreport, you have pointed to risks to fiscal deficit. So how confident is RBI of a fiscal correction and thereby room for rate cuts?
The perception is that somehow the only thing standing between the rate action and the RBI is the fiscal correction and that is a perception we are trying to correct. We don?t look at the fiscal situation as the only or exclusive constraint on growth or macroeconomic situation in general. It is one factor, but there are other factors as well that are out of our control. For instance the global situation, domestic factors that are not directly fiscal in nature.
As these factors change, obviously they will either create more room or reduce the room available for rate action. But it has to be seen through the prism of what they do to the basic balance of growth rate and inflation.
Isn?t fisc the easier way to get comfort considering other non-monetary factors like FDI policy, infrastructure are longer-term implementations?
So, policies that are going to address bottleknecks to growth or source of inflation are absolutely welcome from both the monetary policy perspective and larger perspective of growth and investment. I think it is really a matter of judgement as to which one can be done and how quickly. As that process plays out, it is going to create or reduce the space available for complementary monetary action.
The main factor that has changed between the last review to this is the monsoon. Has the baseline projection of monsoon and farm growth changed drastically for the RBI?
I think the impact on growth is not that significant although it does play a role in scaling down agricultural growth from the period of normal monsoon to what we are seeing now. The impact on inflation is more significant. A number of crops are clearly vulnerable, those significantly grown in states that have suffered the maximum shortage of rainfall. So that has spread into our projection of food inflation and translated to overall higher inflation projection on headline. Core inflation has been fairly stable and given the growth situation, we don?t expect that to be too variable. So most of the increase, or I would say all of the increase in headline inflation projection is due to food and energy.
Food and energy prices are not in RBI?s control. So why is it worried on things it cannot control?
If you argue that monetary policy has no role in supply-side inflation, you are actually ignoring the very important channel of expectations that now plays an important role in monetary policy framework and the argument there is that even if monetary policy action cannot directly influence the source of inflation, they can give appropriate response to contain the spillover of supply-side inflation to more generalised prices through the expectations channel.