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Not aiming for 4% CPI inflation by Jan 2016: RBI’s Rajan

The Reserve Bank of India Tuesday held rates, crushing market and India Inc’s hope of a rate cut. In an exclusive conversation with CNBC-TV18’s Latha Venkatesh, RBI Governor Raghuram Rajan said the central bank needs little more comfort on inflation before cutting rates.

The governor added that significant rate cut depends on the deflationary process. He is not uncomfortable with undershooting 6 percent inflation target and is not aiming at 4 percent consumer price inflation by January 2016.

Below is verbatim transcript of his interview:

Q: I hope we will continue to get this chance to interview you as Governor of Reserve Bank. I hope you are not going away to the BRICS Bank?

A: No

Q: There were reports saying that your name was mentioned?

A: I have not heard anything about it.

Q: You have not been told, not asked?

A: This is a job that I am doing the only job I care about and I am happy here.

Q: You are happy here but it is quite possible that you may be requested to take on?

A: That is hypothetical question.

Q: No I am not indulging in hypothesis?

A: No, I have not been asked about it and I am very happy here.

Q: What is the sense you are getting about this 6 percent in March 2015 and the 6 percent in January 2016? Do you think you will achieve it more easily? Can you give say a chance of more downside surprise?

A: Every reading we have had on inflation since November of last year has been good and so that is suggesting that something is happening in this economy which is changing the environment. Now after five years of very high inflation we should not be faltered for trying to make sure that this is the real thing because we have had false alarms before.

In every additional inflation reading we seem to confirm the trend. Our policy was saying that we need a little more comfort but we want to do this in such a way that barring exceptional eventualities that we can’t foresee, when we change we change in a direction that is easy to anticipate and you would anticipate that further moves would be in the same direction.

Q: Do you suspect that given that you have got downside surprises, very pleasant ones over the last 12 months to the inflation reading, is there a decent chance that it will continue?

A: I am hopeful and what we want to do is see if that actually happens. However, all the macro economic surprises India has had over the last year, somebody is watching out for us, have been positive. So, let us hope the trend continues.

If you were mean reverting you would say we have had so many positive surprises now we should start seeing some negative surprises.

Q: What according to you should be the positive real rate of return because at 6 percent it is 2 percentage points, the positive real rate? Is that not enough for you if you see so much clarity up until next year? Do you want to remain at 2 percent or would you be comfortable with 1 percent?

A: The real rate that should prevail in economy depends on so many things including what is your comfort level with rate of growth, the kind of investment cycle that you are seeing. So, when the economy is weaker, the real rate that you would expect would be lower and as it strengthens you would want a higher real rate to prevail.

If you look at the world, what real rate is prevailing in other economies, it is in the 1.5-2 range for developed countries and for emerging markets a little higher. So, we don’t have a specific precise number in mind but the range would be somewhere between 1.5 and 2.5; that would be a perfectly acceptable real rate.

Q: If that is the acceptable real rate and your forecast is that inflation is going to be in and around 6 percent through calendar 2015 there isn’t so much scope for it to fall at all?

A: You are making that judgment I am not going to verify or deny that judgment.

Q: The trend you spotted was yours?

A: Obviously, the scope for further rate cuts, of significant rate cuts depends on the pace of disinflationary process. Six is not a magic number that we hope to stick to. Overtime it has to go below six if the government formally approves the target of four plus minus two than we would be nudging closer to the four overtime number.
Now that timeframe over which we reach the four has still to be determined and so on. However, that would give you more room at that point to cut more. You are absolutely right there if there is a certain real rate that we need for saviors in this economy that means a certain amount of room and that to get more room inflation has to fall further.

Q: In that case is it possible or is it very much in your thinking that this 6 percent 2016 target is a very transient target, you will find yourself bringing it down in the months to come?

A: It is important that when you set something you stick to it.

Q: Do you see it coming is what I mean.

A: We may undershoot the target and if we undershoot the target we are not going to feel uncomfortable about undershooting. If we expect to overshoot the target we will try and bring it in within the target but the time over which it is going to reach closer to the central point of the band is something that will have to be determined as we formalise.

So, what is the period over which we are going to look at meeting the inflation objective? It doesn’t mean that we have to be at 4 percent on January 2016. As I said in the policy announcement that if we get to 6 percent we are at the extremes of the target and if we do better that is fine but at this point we want to get to 6 percent.


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