4% inflation target shows govt is committed to reforms: Das

Sajjid Chinoy of JPMorgan said the Consumer Price Index is the anchor. Many countries have faced this dilemma before settling on CPI, he said. In the medium-term, he said, there may not be space to cut rates.

Soumya Kanti Ghosh, State Bank of India, said that it is a well-advised move coming at the right time. “We have ruled out any rate cuts in the August policy meet,” he said.  He said that the space for rate cuts is almost non-existent and the RBI will be concerned about liquidity measures.

A Prasanna, Chief Economist, I-sec PD, said that CPI being the anchor is not surprising. “What is surprising is the 4 percent inflation target. My impression was to leave the target in the 2-6 percent band. It is a big departure from what we have expected.” But it is still a positive.Below is the verbatim transcript of Shaktikanta Das, Soumya Kanti Ghosh, Sajjid Chinoy, A Prasanna & Sonal Varma’s interview to Reema Tendulkar and Latha Venkatesh.Latha: There is an all-round congratulation for the government’s commitment to this inflation target that was put in the Monetary Policy Framework Agreement (MPFA). Your thoughts on it - now the government stands committed to very strong macros of low and stable inflation.Das: The government is committed to structural reforms and other kind of reform measures which have been announced in the Budget and outside the Budget. Only just two days ago, as you know the GST constitution amendment was passed and before that the bankruptcy legislation has been undertaken. And this 4 percent inflation target, which was announced, the papers were laid in the Parliament earlier today, it again demonstrates government’s commitment to undertake monetary policy reforms. And it is not just the number which is important, the 4 percent plus-minus two, but what is important is that the whole process of determining the policy rates, that also the entire decision of the government adds a lot of value and transparency to the process of decision making. There will be a lot of deliberations in the monetary policy committee and in the event of a failure to meet the target, again there will be a report which the RBI will give to the government which of course will be shared in due course with the various stakeholders and RBI will also give the roadmaps for correcting any deviation or any failure to meet the targets. So, on the whole, it is a very important monetary policy reform with the required statutory basis.Latha: Actually the country has probably laid the foundations and the bastions that will prevent it ever from going towards any 6 percent plus mark. 7-9 will become definitely an aberration, probably it will never happen hopefully, in the history of the country going forward which is a very strong statement of macros. But since you referred to the monetary policy committee as well, should we expect the members to be named and the committee in place sometime soon?Das: It will be done as early as possible and the process has already been initiated, so it will be done as early as possible. Latha: Should we expect it in a week, two weeks? Should we expect it at least in the month of August?Das: I cannot set a timeline for that but it will be done quickly, because it is a process. There will be a selection committee; the names have to be shortlisted, then internal approval from the competent authority, so it is a process. I cannot set a timeline, but obviously, it will be done as early as possible.Latha: It has been a nail biting weight for the naming of the Governor himself and now, we have three other names for which the business community, the financial sector and in fact, the nation will eagerly wait. When would the Governor's name be known? You have any timeline on that?Das: I cannot really comment on that because it is not possible for me to comment on that.Latha: I have one more question on 4 percent plus or minus. Do you think now 4 percent will become a genuine aspiration for the government? Up until now, 6 percent means, so long as I do not violate 6 percent on the upside, I am still within the law, but the RBI has so far, actually taken 4 percent very seriously and in repeated conversations and monetary policy stance has at least indicated that at some distant, not so distant date, actually in a couple of years. I think the date mentioned was January 2018. It will aspire to 4 percent. Will that aspiration also be shared by the government?Das: When the government notifies something, obviously, the government has a commitment to this important reform and that is why it has been notified. But let us also keep in mind, and please do not read anything beyond what I am saying on the face of it. If you read the act, the amendment in the Reserve Bank of India Act which was undertaken as a part of the Finance Bill this year, it says that the policy will focus on price stability with due emphasis on growth and also to meet the challenges of an increasingly complex economy. So, the whole thing has to be read in totality and obviously, 4 percent is the target. There is a range and the range is necessary because from time to time, there could be temporary volatilities, there could be some temporary mismatch, failure of one particular crop and which may have significant impact on food inflation. And as you know, food inflation forms an important component of the consumer price index because the 4 percent is as per consumer price index (CPI). So, therefore that range has been provided to give room for any temporary fluctuations or any kind of temporary deviations in demand and supply or other factors._PAGEBREAK_Reema: Your initial reaction on 4 percent, plus or minus 2 percent band on inflation for five years till 2021 and second, on rate cuts perhaps from RBI. What does this mean?Chinoy: Let me see, this announcement caps off an excellent week we have had. This is through institutional reform. We first had the Goods and Services Tax (GST) passed two days ago. We have been talking about one of the most important reforms in the last year has been an institutionalisation of the new monetary policy framework. We have seen the RBI Act has been amended to incorporate the fact that the RBI now will target headline consumer price index (CPI), we are on the verge of setting up a monetary policy committee and the fact that the government has stuck to its agreement with the RBI will give a lot of confidence to the investors both in India and around the world, that we now mean business on inflation targeting. So, this is a wonderful institutional development and a very positive reform indeed.Latha: Since the commitment to the monetary policy committee appointment is also coming that further institutionalises the anti-inflation mechanism?Chinoy: Absolutely and all the pieces of the puzzle are falling together very nicely. The choice of monetary policy members at some level while important is secondary to the fact that we now have only bounded discretion. The fact that whoever is on the monetary policy committee has to adhere by the fact that inflation has to be below six percent and your central tendency has to go towards 4 percent permits discretion and permits the RBI to have some flexibility but only permits bounded discretion and that is a source of comfort and lot of investors will take away that no longer will India be in a situation where CPI inflation will be running at 8 or 9 percent for years on end like it was between 2007 and 2013. I will just make one more point. Let us not jump to conclusion on rates. I completely agree in the near term there is no space to cut interest rates given where inflation pressures have been.Latha: Your thoughts that the inflation target 4 percent plus or minus 2 percent is now law?Ghosh: I think I have been arguing about this inflation targeting for a long while, so now that it has became a law, so there is no point getting into these mechanics of it. It is an institutional law it is a well advised move coming in at an appropriate time, but just one point I would like to mention about here is that now that the RBI, the government all are bound by this 4 percent plus minus inflation targeting. I think the market should not at every policy expect a rate cut because now the focus of transmission should move to other aspects apart from the reported which is often talked about. So we will see more of this liquidity measures, more of this others measures being put in place, which will help in better transmission across the market.The other thing which I like to point out is that given the current way the CPI is around 5.8 percent, which is the upper end of this 4 percent plus minus 2 percent target and if you look into the history of the food prices over the last 60 years where at least on 60 percent of the occasion it has averaged over 7 percent. I think the government will have to be very careful in it supply management priorities and there cannot be any half measures to that aspect. So if you are targeting 4 percent inflation with plus minus 2 percent - that is fine that will give a lot of credibility to the markets in terms of managing inflation to the expectation in terms of managing the structural growth over a longer period of time but at the same time you have to be very careful that market will not tolerate any adverse impact on the veggie prices which is a common thing which happens in India every 2-3 years.Latha: Your thoughts on both these pieces of information that the CPI is going to be the anchor and the government is going to notify that the CPI shall remain at 4 percent plus or minus 2 percent up until 2021, so that’s a five year commitment which government and RBI are now committed?Prasanna: The fact that CPI is going to be the anchor is not surprising at all, but what is surprising is that they are zeroing on the 4 percent number and they are going to mention in the law. My impression earlier was that they will probably leave it at 2-6 percent band and then leave it to RBI or the MPC to decide on interim targets, but if they are going to mention 4 percent in the law then that is definitely a big departure from what we have had until now, so on the one hand definitely I think the government committing to a target like this is definitely a positive which means that their fiscal stance also be mindful of this target, but on the other hand I really question the wisdom and I think it is going to be extremely difficult to hit that 4 percent target on a consistent basis in India and the lot of things changed. However, my only concern is that at this point of time they are notifying it and later on we will start getting uninformed commentary about the wisdom of 4 percent both within and outside the government. So hopefully whoever is notifying it they put a lot of thought into it and defend that later and not leave that to RBI alone.For entire discussion, watch accompanying videos.