Cannot let guard on rupee, inflation slip: C Rangarajan

C Rangarajan, Chairman, Prime Minister's Economic Advisory Council, welcomes RBI governor Raghuram Rajan’s move to reduce marginal standing facility, or MSF, rate. However, he cautions, one cannot let the guard on the rupee slip and nor can the concerns on inflation be forgotten. He feels that is the reason why the repo rate was raised. He does not think growth will be impacted by the 25 basis points repo rate hike.

Also Read: RBI ups repo rate by 25 bps on inflation concern, MSF cut
He feels in the coming months, inflation is likely to come down on the back of the good monsoon across the country. But if it doesn't then there is a possibility that more measures will be introduced to tame inflation.
According to him, PMEAC's estimate of 5.5% wholesale price index (WPI) inflation by FY14-end looks valid. RBI had estimated FY14-end WPI inflation at 5%. Below is the verbatim transcript of C Rangarajan's interview on CNBC-TV18 Q: Your first thoughts – repo up, marginal standing facility (MSF) down?
A: I think it is an appropriate decision, it is a difficult decision but in my view the correct one because the rate on the MSF has to be brought down because that was an emergency measure that was introduced. Obviously, it could not be done in one go therefore he has decided to reduce it by 75 basis points. But at the same time we cannot let our guard on the rupee slip and nor can we ignore the fact the inflation continues to remain at a high level even if core inflation maybe down but overall inflation, both wholesale and retail are remaining high and therefore some signal has to be sent out and therefore the repo rate has been raised by 25 basis points. Q: Do you think there is scope for further rise in repo rates because we are continuing to see the wholesale price indeed (WPI) spike by almost 1.2 percentage points month on month, so is there more to come after all the yield curve is still terribly inverted?
A: There are another six weeks before the next decision has to be taken and therefore we can watch how inflation behaves. So, if inflation does not show any sign of coming down then possibly further action will be required. But I do not want to anticipate anything. There is a possibility that the impact of the good monsoon can be felt on food inflation rather early. If that happens then perhaps we can see a trending down of the food inflation and sense the non-food manufacturing inflation is already under control then together we can see a declining trend in the overall inflation. Therefore, I do not want to anticipate what action could be taken in six weeks from now. But as of now a signal was required and that has been sent through the rise in the repo rate. Q: What do you think this might do to growth, after all there is no easing measure and it does not look it is on the anvil either – will growth get postponed therefore?
A: I don’t think growth will be affected because of the 25 basis point rise in the repo rate. I think look at series of action that has been taken in the recent period to stimulate the economy and therefore those are the actions and those are the ones which will have major impact upon the growth impulse.
I have been telling you on earlier occasions too the action with respect to achieving the production and capacity creation target in key infrastructure sector that lay in the public domain like coal, power, roads and railways will have a greater stimulating effect on private sector economic activity and investment sentiment. I think the need to control inflation continues to remain a major concern of the central bank and that is coupled with the need to see that the stability that we have achieved in terms of the value of the rupee continues through the coming months. Q: Just on this inflation projection itself – just to ponder a little a bit more on what Rajan said where he mentioned that the WPI will be higher than what was projected earlier in whole of FY14 – do you think the PMEAC will now have to scale up its inflation of 5.5 percent for FY14 or will it continue to remain at that level?
A: The Reserve Bank had originally estimated the WPI inflation by the end of the year at 5 percent and we had put it at 5.5 percent. At the moment, our estimate of the WPI inflation ending at 5.5 percent. In the current fiscal it appears to be valid because I mentioned an answer to your earlier question – food inflation will definitely come down this year and since the non-food manufacturing inflation is already at a low level, we should expect a slight downward trend for the high level that we have seen now.