Reserve Bank Governor Raghuram Rajan Friday said no single data point will determine the central bank’s next move on curtailing high inflation amidst a weak economy, even as he hoped that a good monsoon will lead to generation of disinflationary forces.
In the past two consecutive policies, the RBI raised the repo rate by 0.25 percent each in view of the worsening price situation. The next policy is scheduled on December 18.
“No single data point or number will determine our next policy move….We are going to look at all the data, understand where we are and take further action,” Rajan said at the annual banking event `BanCon 2013′ here this evening.
Demand needs to be reduced without having severe effects on investments and supply as low growth itself helps curb inflation as a disinflationary tool, he said.
“The weak state of the economy, as well as the good Kharif and Rabi harvest on the back of a good monsoon, will generate disinflationary forces that will help, and we await data to see how these forces are playing out.
“This is a balancing act, which requires RBI to act firmly so that the economy is disinflating, even while allowing the weak economy more time than one would normally allow for it to reach a comfortable level of inflation,” he added.
The repo rate now stands at 7.75 percent. In the previous two reviews, the policy rate was hiked citing persistent inflationary pressures, especially driven by food articles and services.
While WPI inflation for October rose to an eight-month high at 7 percent, retail inflation jumped above the double-digit mark to 10.04 percent in the month.
On inflation control, he said one way to curtail inflation is to increase supply and the other is to slow down the demand. “Typically, you have to follow a balancing act. Supply usually takes a longer time to come in and you can tolerate higher inflation until it comes in but of course, inflation itself has negative effects on people’s incentives to create supply. This is a balancing act.
“You have seen from every statement we made that we are following that balancing act. We want to ensure that inflation doesn’t get out of control, but we also recognise that we are a weak economy and that weak economy itself helps somewhat in inflation as demand is also weak,” Rajan said.
However, Rajan was quick to add that RBI is focused on controlling inflation as it hurts all segments of the society, particularly the poor. “But more importantly, inflation creates a disjuncture between investors, producers, manufacturers and consumers and savers.”
On growth, the RBI governor said, “The economy is in a period where we are sort of struggling to pick up… Though we have evidence of good news, IIP numbers don’t confirm of a strong recovery. But I am hopeful, monsoon is going to help, exports will help and I am enthused with the growth in power.”
In a lighter vein, the governor said the increased traffic of ships in and out of the city’s ports, as seen from his south Mumbai office, was a sign of greenshoots.
“As I stand on the 18th floor of in my office and look outside, I see the port. And I see more ships coming in and going out to a greater degree than I saw in September. It illustrates that the exports are picking up and that’s good news.”
On the tapering fears, he said whatever time we get should be used to set the house in order instead of sitting on the edge of seats and keep worrying about it.
“To my mind, a more useful productive way of us using our time is to look at our own domestic issues and focus on cleaning them up. My sense is that when the world sees us dealing with whatever challenges we have and moving on, that takes care of lot of apprehension.
“If we keep looking outward, rather than inward at this point, we may get distracted from our true mission which is deal with the problems we have,” he said.
However, he said that “we are in a better position now partly because of the CAD having come down significantly not just in the government or the RBI’s perception, but in analyst perception since July.
“But an added benefit during this time is that we have demonstrated that we can raise resources if need be. That is also a valuable addition relative to where we were in May-June,” he said.
On Wednesday, Rajan had allayed fears on the Current Account Deficit (CAD) front saying the fiscal will close with under USD 56 billion CAD at 3 percent of GDP. Last fiscal, CAD stood at USD 88 billion.
PTI