RBI sees FY14 GDP growth at 5.7%, however Rangarajan feels it is still possible for India to achieve 6.4 percent growth in FY14.
Welcoming the Reserve Bank of India’s (RBI) move to cut repo rate by 25 basis points , C Rangarajan, chairman, PMEAC said, economic growth is at early stages of recovery and the wholesale price index (WPI) inflation has shown sign of decline.
But retail inflation and current account deficit (CAD) are still high, so this is an appropriate compromise by the central bank. However, further monetary easing will depend on how the economy evolves and fall in inflation, he told CNBC-TV18.
RBI expects inflation to be rangebound around 5.5% in FY14 and aims to reduce it to 5% by March 2014 using all instruments. However, the central bank feels that WPI inflation is close to its tolerance threshold level and added that monetary policy cannot lower guard against inflation pressures.
“The 5 percent inflation is a goal towards which the RBI would like to move. 5 percent inflation has always been regarded as the comfortable level,” Rangarajan added.
Meanwhile, RBI sees FY14 GDP growth at 5.7%, however Rangarajan feels that the steps take since September last year and post Budget will have full effect during the course of the year and it is still possible for India to achieve 6.4 percent growth in FY14.
Below is the edited transcript of C Rangarajan’s interview with CNBC-TV18
Q: The document appears a bit hawkish besides just cutting by 25 bps, the Reserve Bank of India (RBI) has chosen to say and I quote the governor, “The balance of risk stemming from the RBI’s assessment of the growth inflation dynamic leaves little space for further monetary easing”. What do you make of this statement?
A: It is a measured response to the current situation. The wholesale price index (WPI) inflation has definitely shown sign of decline. The retail inflation is still at a high level and the current account deficit (CAD) also requires some contraction of demand pressures. However, at the same time, growth is in the early stages of recovery.
Therefore, the RBI has worked out an appropriate compromise. It is a good decision that they have taken to reduce the policy rate by 25 bps. Going ahead, what RBI would depend to a very large extent on how inflation will behaves. There is a possibility of further easing if inflation goes down and there is a substantial space available to monetary authorities.
At this particular point one has to be somewhat cautious because there are many adverse factors operating in the system. I would say that further actions will depend entirely upon how economy evolves and how prices move.
Q: How would you read this sentence, “there is little space”? Would it mean no space or would it mean space for just one more cut? The RBI says in its inflation target that it will endeavour to condition the evolution of inflation to a level of 5 percent by March 2014 indicating that it is determined to bring the inflation level to 5 percent by March 2014?
A: Whether there will be a cut or not depends upon how the inflation tends to behave. The 5 percent inflation is a goal towards which the RBI would like to move. 5 percent inflation has always been regarded as the comfortable level.
Therefore it is an intention on the part of the RBI to achieve a certain goal but whether they will do or not is a different matter. The point is that the space available to the monetary authority will depend entirely upon in my view how inflation behaves in the coming months.
If inflation tends to move in the direction of cutting 5 percent, I would think that there will be greater space. On the other hand, if inflation continues to remain sticky, more particularly the retail inflation then the space becomes limited. I do not think you should read from the sentence that there is no possibility. All that I would say is that the RBI would be cautious as far as the direction in which they are moving.
Q: Give us one word on the growth forecast, it stands at 5.7 percent and they expect any recovery only in the second half, that is in sharp contrast to what the Budget has assumed and what you have forecasted, do you think you will have to lower your forecast in the coming months?
A: No, as of now we think that the growth rate could be around 6.4 percent. We presented our report last week and there is no fresh evidence as far as I am concerned, which will alter that rate of growth.
I believe that the many of the actions that we have taken since September of last year, the actions indicated in the Budget and the post Budget period, will have that full effect during the course of the year. Therefore, we could see in Q2 of the current fiscal itself some improvement in the behaviour of the economy, I still think that the growth rate in the current fiscal would be in the region of 6.4 percent.
ADS BY GOOGLE
video of the day
Barring IT & pharma, Q2 earnings to disappoint: Dimensions