The Reserve Bank's cautious view on inflation is an "appropriate" one says, Prime Minister's economic advisory panel chief C Rangarajan.
The RBI left key policy rates untouched on Thursday mainly on the back of high fiscal deficit and rising crude oil prices.
Speaking to CNBC-TV18, Rangarajan says, the RBI is really looking at the behaviour of inflation. "The central bank is looking at inflation as its main guiding factor," he said adding, "the RBI cannot ignore headline inflation."
Inflation has firmed up to 6.95% in February from 6.55% in January. Also, the rising crude oil prices to USD 125 a barrel indicates further hike in inflation.
The central bank has not cut rates for more than two years. In this period, the repo rate, which is the rate at which banks borrow money from RBI, has gone up by 3.5% to 8.5%.
However, last week, RBI slashed CRR (cash reserve ratio) from 5.5% to 4.75%. According to Rangarajan, the CRR cut was a bold and important step.
Below is an edited transcript of his interview with CNBC-TV18. Also watch the accompanying video.
Q: Do you think the RBI was prudent by pausing before hearing the Union Budget? Would you expect it to cut rates in its April policy?
A: Well, the RBI has taken a cautious stand and I think that is appropriate after the bold act of cutting CRR by 75 bps. The central bank is using inflation behaviour as a guide to effect policy rates.
Q: Should the RBI wait even in April if inflation remains suppressed?
A: Well, April is still six weeks from now. It is not easy to predict food and headline inflation. So, the RBI will initiate policy changes only when there are definite signals of a decline in inflation.
Q: How strong should the signals be?
A: Core inflation coming down is good. But overall inflation is still close to 7%. This is discomforting and cannot be ignored. The Reserve Bank will have to take into account both headline and core inflation.
Q: Does fiscal deficit become important due to its tendency to increase inflationary pressures?
A: Fiscal policy plays a vital role to play in containing demand and the Reserve Bank will be closely watching how the policy will be outlined in the Budget tomorrow.
Q: Will the widening fiscal deficit top the RBI