Little sign of inflation falling ‘decisively’: Patel
To hit 4%, MPC had to go beyond headline numbers, says RBI governor
The Reserve Bank of India (RBI) kept interest rates unchanged last week—a move that surprised the markets— because inflation was showing little signs of falling “decisively” below 5% to the desired level of 4%, central bank governor Urjit Patel said in an interview broadcast on Friday.
In order to hit the 4% level and keep it there, the monetary policy committee had to look “beyond” and “through” the headline number—into what exactly was stopping inflation from coming down to the desired level, Patel told CNBC-TV18 in his first interview since taking over as RBI governor.
The RBI’s 8 February decision to keep interest rates unchanged at 6.25% surprised the markets amid expectations of a cut to 6%. Against that backdrop, Urjit’s comments constituted a defence of the panel’s decision to change the monetary police stance from “accommodative” to “neutral”.
An accommodative policy allows the RBI to encourage spending by, among other measures, lowering interest rates and buying treasury bonds.
A neutral stance gives it the needed flexibility to either hold rates, cut them or raise them depending on what is needed to achieve the inflation target.
According to the governor, the RBI along with the rest of the monetary policy committee looked at various components of the headline inflation number to see which component needed concerted action so that the mandated 4% target can be met.
“We have been mandated by the government backed by legislation that we have to have an inflation target of about 4%,” Patel said.
He said the committee felt that inflation—excluding food and fuel—has been “stubborn since September-October and has shown little sign of coming decisively below 5%”.
Another reason for holding the interest rates steady was that the committee thinks that the effects of demonetisation and now remonetisation may also have an impact on some of the commodities whose prices have fallen—meaning food and fuel— “but we don’t know to what extent and for how long”. “It’s most likely going to be short lived, for instance the disinflation in vegetable prices. Therefore the headline number needed to be looked through keeping in mind that we need to get to closer to 4% on a durable basis but in a calibrated manner.”
Patel reiterated the RBI’s projection that inflation was likely to be in the region of 4-4.5% in the first half of the next fiscal year before rising to 4.5-5%—that too was one of the main reasons to for the shift in the stance, he said.
Internationally, he pointed out, prices of food and commodities have gone up.
On the impact of demonetisation, the banking regulator said that because of the speed with which the central bank has been able to replenish the economy with new currency notes, any negative impact on growth would be short-lived.
Patel said that the benefits arising out of the demonetisation exercise such as greater accountability, better public finance and more transparency would take some time to play out fully. Dealing with counterfeit currency notes was also a major issue that has been addressed through the exercise, he said.
“I think in all these supportive policies more work is needed so that these benefits are not only tangible but are long lasting and durable,” Patel said.