The ongoing decline in oil prices is more than what RBI has expected and this will help in fighting inflation, central bank’s Executive Director Deepak Mohanty said today.
“Whatever assumptions we made in terms of oil prices and other commodity prices, subsequently what we see now is that the prices have come off even more. So, the disinflationary process would see a bit stronger than what the last policy had done,” Mohanty, whose remit includes the crucial monetary policy department, said at a conference.
The price of Indian crude basket has fallen to a low of around USD 81 a barrel as against USD 108.05 in May end.
At the last policy review on September 30, Governor Raghuram Rajan had said the trajectory of inflation was on course as assumed by the RBI in its glide path.
He had said the target of getting consumer price inflation to 8 per cent by January 2015 was more certain, while the risks to the January 2016 target of 6 per cent had subsided.
It can be noted that the RBI has been very vocal with its resolve to contain inflation in a decisive manner and has been holding on to elevated rates to achieve this objective even at the cost of criticism from the pro-growth lobby, which wants a rate cut.
The comments from Mohanty come days after deputy governor H R Khan flagged the concerns on inflation, pointing to systemic issues which are resulting in price rise.
Mohanty said the lower crude prices, coupled with a stable currency has helped reduce the inflation. However, he expressed caution, saying we should not be “overly joyous” stating that the 6.46 per cent number will rise further soon.
“There is a base effect in that and we should not be overly joyous over the fact that we are at 6.5 per cent, but it could slightly go up as we go down the line,” he said.
Mohanty said even though the headline inflation number is coming down, the expectations of households continue to be for double digits inflation, which need to be addressed.
“The inflationary expectations of households continue to be high at double digits, it is important we bring down the expectation,” Mohanty said, adding that the government resolve to reduce fiscal deficit to 4.1 per cent of GDP has also helped fight inflation.
He said there is also some moderation on the rural wages, which will help the inflation situation. Mohanty said with the reduction in inflation, the policy rates have come in the positive territory after a long time, after remaining negative for a long time. He also defended the RBI’s elevated rate stance, saying it is not affecting growth.
On exchange rates, he said the RBI intervenes in the market only in case of excess volatility and the forex reserves we have built up are “healthy”.
The current account deficit, which had caused much damage to the currency last year, is “sustainable” at present, he said.
Mohanty also expressed concern about diversion of savings into physical assets like gold, saying there is a need for the financial savings to grow.