RBI is watching how govt delivers fisc next yr: Chaudhuri

Excerpts from What's Hot on CNBC-TV18 Watch the full show »

The RBI's policy after today's credit review appears that it is moving away from a regime of tightening to a regime of easing, says planning commission member, Saumitra Chaudhuri.

In an interview to CNBC-TV18, Chaudhuri says headline inflation has fallen due to food inflation getting a breather. He says the central bank now has that much needed legroom to ease policy.

While today's 50 basis point CRR cut took the market and analysts by surprise, Chaudhuri says it is not unrealistic to expect another CRR cut in the next credit policy review.

Below is an edited transcript of his interview. Watch the accompanying video for more.

Q: How do you read the RBI's commentary with regards to inflation and monetary easing? The RBI doesn't seem particularly convinced with the relief that we have seen on the inflation front for now?

A: 'The proof of the pudding is in the eating.' You look at the December numbers and if you look at the previous numbers one could argue that the way inflation has been moving, it has been moving in the trajectory that the RBI had suggested in its previous policy statements. It's moving towards the decline and it was not inconsistent with it being around 7% at the end of March.

However, if you look at the December numbers both for inflation or manufactured commodities and for the core index it was running quite high. Core index if I am not mistaken is around 7.6%. These were still high numbers, they had not eased. The reason why headline inflation has eased was because food inflation was down, which is good, which was one great thing achieved but the second part of it which is manufactured goods in the core index was still not there.

What one could argue, is will it ever be there? No, it could be there maybe most likely in January and certainly in February it will show up. RBI said - I will watch and wait and it seems that it is moving in the right direction, but its worthwhile being certain about it. They have said I now have the freedom to conduct a mode from a different monetary policy to move away from the regime of tightening to a regime of easing. For the timing, I want to see bit more evidence.

So they have clearly seen enough evidence to decide, to reduce the CRR, not by 25 basis points, but a 50 basis points. Everything has to be in one direction. So they are saying let me wait for a little while, I think you will go in the right direction, but I would like to make sure. If that turns out to be correct, which is probably from the view they can take maybe a little later down the line, that is when the time would come for them to start moving the policy rates.

Q: The RBI seems to be sending out the message that it finds itself boxed in because the government has not been able to meet expectations as far as the fiscal consolidation map is concerned. The RBI in a sense is saying - I am constrained I cannot act even if I want to because you haven't been able to deliver on your promises on the fiscal consolidation front?

A: Lower fiscal consolidation, lower interest rates, lower inflation and external payment stability, these are the four pillars of macro economic stability. They all have to be in place. It's pretty obvious that the fiscal numbers for this year are not going to turn out any where what had been promised; it's going to be worse. The issue is what is it going to be next year, this year is done.

What I think the RBI is suggesting is that if you would like to see bit more action on where next years fiscal is going to go because if the governments demand for finances are very high then there are certain limits. It sets limits to what can happen to the other pillar of macro economic stability which is lower interest rates. So, you could have lower interest rates, lower inflation but that would also mean lower fiscal deficit. Would they all come in place is something we also have to wait till the budget to take a view on what government might be able to deliver next year. This year we all know where it is.

Q: The fiscal deficit target for this year is not going to be met that's certain. The government is not putting a number on the kind of slippage that it expects, what does this mean for the RBI in terms of when to start unwinding, when to start easing the rate cycle?

A: This year is done as far as the government's fisc is concerned. Both my bosses Dr Rangarajan and Dr Ahluwalia both talked about 1%, I am quite free to say may be 1%, but 1% is this year, all been financed, it's been done. So, whatever pressure is there on the market because of the government's additional requirement for funds have all come into play. We are not talking about this year, we are talking about next year.

Next year what is the borrowing program going to be like? Is it going to be sufficiently so large that the RBI will be constrained with interest rates? Is it going to be not so large and the RBI will have some more freedom on interest rates, its all about next year. So, next year's position is something that's only going to become clear around the budget time, but that's further down the road. I am quite sure that if these inflation numbers ease out there will always be ground for some amount of monetary policy easing irrespective of the fisc, but that's only a small part of it. A large part of it will depend on where the fisc is going.

Q: What do you expect the Reserve Bank to do since everyone is speaking of calibrated action? The view is again divided on whether or not there will be another CRR cut in March when the credit policy is unveiled or whether we will see the RBI moving with a repo rate cut, what do you expect?

A: It's possible. Even a 50 basis point CRR cut, it would not be realistic to expect another one in the middle of March. However, some small easing of policy rates is possible if inflation numbers behave. The next stage of a more comfortable monetary policy next year is going to be somewhat contingent on what the fiscal numbers comes out at the end of the budget. The budget is going to be presented probably after the RBI's next monetary policy statement. It's only in the April annual policy statement the RBI will be able to really factor in what's going to happen with the fisc in terms of what those monetary stats are going to be for the next year.