On deputy governor Urjit Patel Committee’s recommendations on targeting CPI
The Urjit Patel Committee is being studied. Some recommendations require both the government as well as the RBI to come on board. So as and when we proceed, we have to have a dialogue with the government. As far as today goes, we are taking a piece talking about taking a disinflationary path. We need to bring down inflation. We have made a lot of noise about the CPI inflation. RBI has focussed on both CPI and WPI. Given the fact that the CPI has stayed high and what consumers sees we have to bring it down. Committee gave a timeframe which is reasonable. Whether the CPI new has a long history? Over a time, we have to make the index better.
On core inflation
The Urjit Patel Committee has recommended flexible medium term inflation target. We will take up what requires co-operation with the government. We have time and again said that we need to bring inflation down. The best way for us to sustain growth over medium term is to bring inflation down. We are cognizant of the weak state of the economy. The committee has suggested a disinflationary path. Based on our model, it looks like we should be able to reach 8 per cent objective by the end of the year. That is exactly what we have suggested for.
Core inflation tells us about the second round effects. We look at all components. Even within core, there are some we need to pay attention to for example education is going up strongly. We need to pay attention to all aspects. The important point to make is that inflation is just not food inflation it is more than that.
On whether growth is second priority compared to inflation
You can’t juxtapose growth versus inflation which is a mistake that many people are doing. If we cut the policy rates today, do you think the banks will go ahead and cut deposit rates? The deposit rates are high as inflation is high. So a customer wants a real rate of return. Cut in policy rate is not going to create a immediate reduction in banks cost of funds, not going to create a reduction in borrowers cost of fund or lead to immediate demand. The best way to create sustainable growth is by bringing down inflation. The best way to look at it is the week consumer numbers, part is because the high prices of vegetables is cutting into people’s budget, they don’t have money to spend on other things. So the notion that inflation is irrelevant to demand and that somehow we can have strong demand without bringing down inflation needs to be corrected. We don’t have magic levers. We have to work at it. I think the message to take from the RBI policy today is that we think with what we have done so far and with the relative weak state of economy, plus with stabilisation of the exchange rates, we have confidence that we will be able to bring inflation to more tolerable limits within the course of the year, and that will give us the room on the monetary front which can then be passed through. But first let’s fight the fight that needs to be fought.
On recovery in the economy
We need to create an environment for recovery to take place and be strong and inflation is part of that environment. On the issue of policy, we need to see how the steps taken playout in the inflationary environment. Once we get enough data, we can decide how the course of policy moves. If in fact, disinflation is stronger than we anticipate, we will have more room to take action. As far as growth goes, remember the government is also taking steps, will all add up together to create stronger growth. I am not in any way not giving up on growth in the coming months as well as coming quarters. We will wait and see…we need medicine and we have injected some medicine with a 75 bps points since September. We have to see how the medicine works along with the stablisation in the rupee and the weak state of the economy. Based on our projections and our model, that at this point we should be able to hit 8 per cent with what we have done. With global volatility, financial market volatility adding to the noise, with domestic volatility will be there with elections, we need to wait and see.
Over the time, what we have decided to do is focus on getting macro stability in India and the rest will follow. That we should focus on getting the domestic environment look a lot healthier. Some of it was focussed on reducing the current account deficit over the last few months and that was part of macro stabilisation. Going forward, fiscal stabilisation, monetary stabilisation is part of getting macro stability. Once we do that, foreign investors will come so that is point number one. Point number two is that yes, we are far better prepared than we were with the numbers we put out today with CAD falling to 2.5 per cent. We can comfortably say it will be below 2.5 per cent for fiscal year 2013-14. The second aspect is that we need to build up reserves. We have asked the oil marketing companies to buy dollars and pay us back when they have to pay for swaps. If they have difficulty, we can do the swaps in rupee terms. It should not be seen as overhang of dollar purchase of theirs. We are watching flows also. Over the last month, we did attract a lot of short term flows in debt market. Some of the volatility in last couple of days is because of some of short term flows leaving. Over time we have to figure out how much we want to expose ourselves to the relatively short term flows. I am glad to say, even during the big sell off last july-August, long term flows stayed with us. Those investors are worried about inflation and their investments. By bringing down inflation, will be investor positive. But primary focus is not the market or the investor but it is the Indian consumer.