Rate hike pause is guidance, not commitment: RBI's Gokarn

On Tuesday, the Reserve Bank of India (RBI) raised the benchmark interest rates by 25 bps , the 13th increase since March last year.

RBI Governor D Subbarao announced that the probability of hiking rates in the future is low.

Deputy Governor of the Reserve Bank of India, Dr Subir Gokarn clarifies that not hiking rates is not a commitment, but a guidance. "The RBI is committed to keeping rates stable to help investment decisions. Guidance on rates is given on the basis of some scenarios," he adds.

According to Gokarn, the central bank is acting now as inflation will be high for next two months.

In an interview to CNBC-TV18's Latha Venkatesh, Gokarn says, food inflation is a structural issue. "It is driven not by cereal, but protein foods," he adds.

He sees inflation moving down from December. Falling inflation, he says, will continue beyond March 2012.

Below is the edited transcript of his interview on CNBC-TV18. Also watch the accompanying videos.

Q: The Reserve Bank says that the inflation level will fall to 7% by March 31. That comes to a calculation of 160. September, the last number we have is 155.8. Now, if you do the math, inflation every month will go up by 0.9 ticks. So, clearly you are not expecting inflation to fall month-on-month. You are only expecting the base effect to work.

A: There is a little bit of a misunderstanding on this. A 0.96 month-on-month is not the same. There is a lot of seasonality in inflation series. In order to compare month to month changes, you have to de-seasonalise the series.

We don't do month-on-month because there is a lot of volatility. But quarter-on-quarter, I will give you some comparisons from Q1 of 2011-2012 to Q2 of 2011-2012 to make the point. In Q1, the rate of inflation was say 7.9% headline. It's dropped to 6.8% in Q2.

On WPI, non-food manufacturing, which as you know we have been trading as our core inflation measure, has dropped from 6.6% in Q1 over the previous quarter to 4.6% in Q2 over the previous quarter.

So, these are indications that when you de-seasonalise the series that is you take out the seasonal effect, you see a clear moderation in the momentum in the inflation series. And then you can build back upto the year-on-year, that 7%.

Broadly to say that it's changing at a constant pace month-on-month does not take into account the seasonality and there is lot of it. So, these are the momentum indicators. The 7% really comes out of this assessment.

Q: It would be nice if Reserve Bank could release its de-seasonalised numbers. Otherwise it's a little difficult.

A: Absolutely. We all believe it's going to be very nice for us to release lots and lots of things. It's work in progress, we will keep that in mind.

Q: During the months November-December-January, traditionally you see a fairly decent fall in food prices. Inspite of it if you are building in a 45 tick jump in inflation then it doesn't look like inflation is falling.

A: Let's again keep in mind that we are looking at three separate components here. We are looking at headline overall, which is the aggregate. We are looking at non-food manufacturing. We are looking at energy and we are looking at food.

For a long time, atleast for the last two years, we have been saying that let's not make the mistake of believing that because we have a good monsoon, we are going to get a fall in food inflation.

We have been arguing that food inflation now is a structural issue. It's being driven not by the standard cereal items, but by more protein content items. These are not very sensitive to the rainfall. This is essentially a surging demand not being met by adequate supply. So, food inflation is likely to remain high.

De-seasonalised quarter-on-quarter numbers, from Q1 to Q2, food inflation has gone up from somewhere around 7-7.5% to somewhere between 8.3% and 8.7%. So, we have seen despite monsoons, we are still seeing a rise in food inflation.

What's driving it? It's been driven by proteins, milk, pulses and to some extent fruits and vegetables that are being driven by demand. Pulses have actually moderated, but milk is a very sharp contributor. So, there is some element of seasonality in food, but there is also a much stronger driver in terms of structural forces.