Mar 14, 2013 02:38 PM IST | Source: CNBC-TV18

Decline in manufacturing inflation comforting: Rangarajan

C Rangarajan, Chairman of PMEAC told CNBC-TV18 that a decline in manufacturing inflation shows modest recovery in the sector. Besides, a fall in non-manufacturing inflation gives room for monetary action, he opined.

The Wholesale Price Index or WPI inflation for February was recorded at a higher-than-expected 6.84 percent against 6.6 percent in January. C Rangarajan, Chairman of PMEAC told CNBC-TV18 that a decline in manufacturing inflation shows modest recovery in the sector. Besides, a fall in non-manufacturing inflation gives room for monetary action, he opined.

"It is slightly higher than what was expected, but not very far-off from what one was hoping. Clearly the decline in manufacturing inflation is the critical number that monetary authorities look at. Therefore, there is comfort in that direction," he noted.
 
Going forward, Rangarajan sees non-manufactured products inflation in the range of 3 to 4 percent. At the moment, headline inflation cannot be completely overlooked, he added.

Here is the edited transcript of the interview on CNBC-TV18.

Q: The February Wholesale Price Index (WPI) number has come in at 6.84 percent, a tad higher than 6.6 percent in January. Would you worry about this or is the trajectory still in place?

A: It is slightly higher than what was expected, but not very far-off from what one was hoping. The other important thing is clearly the decline in manufacturing inflation which is the critical number that monetary authorities look at. Therefore, there is comfort in that direction.

Q: The non-food manufacturing inflation and not just manufacturing, the core index has fallen to 3.8 percent versus 4.1 percent that we got in January. Does this give more comfort to a monetary authority?

A: I think so. The food inflation is caused by a variety of factors, some of which are not quite clearly under the control of the monetary policy instruments. We certainly need to take care of it because ultimately persistence of food inflation spills over to other sectors as well.

Coming more critically to the fact that is important to the monetary authorities is the core inflation. Non-food manufacturing inflation has come down below 4 percent, which is certainly a very favourable factor.

Q: There would be two points which people would look forward to argue against a rate cut, one is CPI has come in at 10.9 percent and Current Account Deficit (CAD) maybe smaller but, it is not a great comfort. Overall, the CAD still stands at probably 6 percent plus for the last quarter. Do you think that might deter the Reserve Bank of India (RBI) or should it deter the RBI?

A: Basically, if you look at it from the angle of the CAD, the role of monetary actions is primarily to contain demand pressures. That means it is responsible for containing the imports by reducing demand. That is the range which monetary policy is supposed to work with as far as the containment of CAD is concerned.

But, given the situation in which growth has just started picking up and the fact that non-food manufacturing inflation is below 4 percent, it gives a greater room for monetary authorities to act.

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Q: Do you think that they have room to act perhaps even in the next policy, that is in May? In your understanding how do you expect the monetary policy to pan out in the next six months?

A: The thing is that what will they do immediately and what will they do over a period of time. As of now, the numbers provide some comfort for monetary authorities to move in the direction of easing. Further actions during the course of the year will depend upon how inflation behaves in the coming months.

If as we expect, inflation steadily goes down and goes below 6 percent, possibly we will expect even more action from the monetary authorities.

Q: Can we expect a further decline in the manufacturing inflation? It has been falling for about four to five months now consecutively. Where do you see manufacturing inflation headed? Does this trend continue for long?

A: It has come down quite substantially and a number between 3 and 4 percent is certainly a comfortable number as far as non-food manufacturing inflation is concerned. But we cannot completely overlook the behaviour of the headline inflation because if food inflation persists long enough, then sooner or later it will also come back to cease manufacturing inflation.

Therefore, I would say that if this trend continues or if it remains more or less at this level, then probably there will be a greater opportunity for the monetary authorities to act. But, immediately I do find some comfort for the monetary authorities.

Q: After the January cut when both Cash Reserve Ratio (CRR) and the repo were cut by 25 bps, we saw banks raising deposit rates. Clearly depositors have voted with their feet. They are unwilling to give deposits to banks if the rates are below a certain threshold. Do you think therefore a repo rate cut is going to make any material difference to the prevailing lending rates or to the economy?

A: I have always taken the view that the repo rate cuts, repo rate adjustments are only a signal. These are actions to be taken by the monetary authorities in conjunction with any announcement of the change in the policy rate.

Liquidity is tight in the market and that is the reason why the banks are unwilling to adjust their lending rates and probably some action on the liquidity side will also be required. These need not necessarily be addressed by reducing the CRR.
 
We are now very close to the bare minimum level, but Open Market Operations (OMO) can be conducted. Therefore, any action on the policy rate side must be accompanied by appropriate action on the part of the monetary authorities to make it stick.

Q: When banks told us about the rise in deposit rates, they were not complaining of an interbank illiquidity or liquidity deficit. They were complaining of a balance sheet illiquidity. Actually they have fewer deposits and the credit deposit ratio has become adverse. Deposits were not coming at lower rates. That was why I was asking you whether a repo rate cut will really push banks even if liquidity was provided in the interbank market?

A: It is not a question of providing liquidity in the interbank market. It is a question of providing overall liquidity in the system. For example, when they acted on the CRR along with the reduction in the policy rate last time, it was a former adjustment in the liquidity situation of the banks.

Therefore, the RBI will have to make an assessment. Even OMOs can be a permanent addition to illiquidity. The simple repo operations lasting for 15 to 21 days is temporary liquidity. But, OMO through which they buy the securities and inject liquidity into the system is more permanent. Therefore, the RBI will have to take the view whether the tightness is simply caused by temporary situations or more fundamental factors.

They should act in a manner in which the liquidity in the system is increased on a more permanent basis.

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