Dec 20, 2012 08:36 AM IST | Source: CNBC-TV18

RBI has taken cautious stand: C Rangarajan

The Reserve Bank of India left policy interest rates unchanged on Tuesday. In an interview to CNBC-TV18, C Rangarajan, chairman, PMEAC says the RBI has taken a cautious stand.

The Reserve Bank of India left policy interest rates unchanged on Tuesday. In an interview to CNBC-TV18, C Rangarajan, chairman, PMEAC says the RBI has taken a cautious stand.

He further says there is a case for easing the monetary policy in January. "Big rate cut seen in January, if WPI fall continues," he asserts.

According to him, inflation is seen settling around 7% by March. He sees FY13 growth rate at 5.7-5.8%.

Below is the edited transcript of his interview on CNBC-TV18.

Q: Are you disappointed that there has been nothing by way of even cash reserve ratio (CRR) in this policy or were you expecting that a rate cut might actually happen in January?

A: I think the Reserve Bank has taken a cautious stand. I think the wholesale price index (WPI) numbers and the retail price numbers showed contradictory trade. But, there is a reiteration of the intention to move towards a more easy monetary policy beginning first quarter of the next year. That has been made somewhat clearer even in the present statement. I think the Reserve Bank wants to follow a policy that can be continued over a period of time. Therefore, it is willing to wait till January.

Q: Now that the Reserve Bank has waited so long for inflation trajectory to peak off, should the January policy cut, which has been reiterated here, be a slightly more forcible one, maybe half a percent will be called for?

A: I think that will also depend upon what happens to the WPI inflation next month, for the month of December. But, certainly all indications are that there is a case for easing the monetary policy in January. If the same trend is reflected for the month of December as well then perhaps a strong easing of monetary policy will be possible.

Q: Would you say that now the RBI would be in a position to even guide for a lower inflation by March 31. They had guided for 7.5 percent by March 31. We are now at 7.24 percent. While a little bit of rise is expected in December and January, given that seminal fall in core inflation, do you think that we should expect revising down of the March 31 inflation forecast?

A: My own forecast earlier was about 7 percent by March 2013. I think we may be heading towards that. There are three more months before the end of March. There could be some pick up in inflation in between. But, I think that it could settle down at around 7 percent by the end of March 2013.


Q: Do you think the Reserve Bank could be accused of being a little behind the curve in terms of helping growth. After all in their trajectory, which they drew for us in the October policy, inflation was expected to peak off in December. From the numbers, which we have now, it appears to have peaked off in September itself. October and November are way lower than the Reserve Bank’s own estimates. Will the Reserve Bank be a little open to the charge that it is behind the curve?

A: No. If you look at the WPI numbers, some of the earlier numbers have also been revised upwards. They have gone up to 8 percent in the previous month, for which the revision was available. Therefore, we need to wait. Perhaps, the 7.2 percent, which we saw for last month, which is quite comfortable in some sense, could also be revised upwards. Therefore, I think the Reserve Bank probably takes a view that major changes could be announced only at the time of the quarterly reviews and the mid-quarter review is not the most appropriate time to announce dramatic changes. I would, therefore, expect the Reserve Bank of India to act more decisively in January.

Q: 5.8 percent is their prevailing estimate for growth, which was announced in October. Do you think we will make that, considering that we did only 5.4 percent in the first half?

A: I think the growth rate will be anywhere between 5.5-6 percent. It could be closer to 5.7 or 5.8 percent, if you want a point estimate. That is a range at which the growth will settle down. Inflation will settle down to 7 percent by end of March.

Q: The Reserve Bank has been quite silent about fiscal deficit even in fact, even current account deficit. Do you think those were the reasons why it did not move on either CRR or repo rate in this policy because those two threats still remain?

A: I think the finance minister has clearly indicated that they would move towards the fiscal deficit of 5.3 percent of gross domestic product (GDP). I am quite confident that will be achieved. I think necessary actions will be taken to do that.

As far as the current account deficit is concerned, I think it is becoming even more intractable. I had thought that the current account deficit could come down somewhat substantially from 4.2 percent to something like 3.6 or 3.5 percent of the GDP. While that does not appear to be happening and therefore, the current account deficit continues to remain a cause for worry. I believe that the Reserve Bank of India will ease the liquidity situation through open market operations. After all, CRR cut or open market operations or alternative instruments are available to the RBI to increase liquidity. I am quite sure that they will act on both decisively or more actively on open market operations to ease liquidity.

Q: Is it your sense that to achieve this 5.3 percent the government will necessarily have to move once again on fuel subsidies, hike prices?

A: Well, not necessary during this year. But I believe that the effort will be to cut other expenditures as well. It is not a very pleasant thing to do. It is not perhaps the most ideal thing to do. But in a situation in which you have to get your fiscal deficit down to a more manageable level, I think there will be a cut across the board in order to be able to reach the goal of 5.3 percent.

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